Better deals on car loans through dealerships now law
Significant protections for those buying a new or used car on finance offered through dealerships start on Thursday.
The new law bans “flex commissions”; the practice where the dealership earns a higher commission the higher the interest rate charged on the loan.
Under the current system, lenders set a base interest rate, but the dealer decides what the customer is charged above the base.
From Thursday, interest rates will be determined by the lender rather than the dealer; though most lenders have already changed their systems before the new law takes effect.
The change is likely to result in car buyers paying lower interest rates and will help protect young purchasers from being charged excessive interest rates.
The new law comes after the Australian Securities and Investments Commission (ASIC) reviewed flex commissions last year.
ASIC deputy chairman Peter Kell said last year, when releasing the review, flex commissions resulted in consumers paying very high interest rates on their car loans.
“We were particularly concerned about the impact on less financially experienced consumers,” Mr Kell said.
“Most consumers would be surprised to learn that when you are buying a car on finance, the car dealer can, for example, decide whether you will be charged an interest rate of 7 per cent or one of 14 per cent – regardless of your credit history.
“Flex commissions do not operate in a fair and transparent way, and ASIC’s action will ensure that consumers are not charged excessive interest rates.”
Under the changes, a dealer will no longer be able to “dial-up” the interest rate that the borrower pays in order to trigger higher commissions.
The lender will determine the interest rate and pay commissions on the basis of a flat percentage of the loan size – the larger the loan the larger the commission.