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.

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IF you’re about to sign on the dotted line to finance a new car, wait until November 1st.

THE world of car finance changes dramatically from midnight tonight, potentially saving buyers thousands of dollars in loan repayments.

Stricter regulations on finance for new and used cars will give buyers the upper hand on interest rates — and slash the kickbacks paid to dealers by lenders.

Under the previous rules, a dealership was allowed to add hefty margins on top of the lender’s rate in return for a bigger kickback.

According to one example provided by a leading multi-franchise dealer, if the lender’s finance rate was 5 per cent interest but the dealer could sign up the customer at 12 per cent, the dealer could reap a kickback of about $10,000 on a loan for a $50,000 car. That’s in addition to the dealer’s profit from the sale of the car itself.

Under new regulations, dealers will not be allowed to increase the interest rate quoted by the lender — instead they can only use their discretion to reduce the interest rate by a maximum of 2 per cent.

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Short of the likes of Abbott and Trump convincing global leaders that coal is good and climate change is a myth, the era of the electric vehicle (EV) will be ushered in with shocking force over the next decade.

Even if climate change deniers (whose opinions are apparently more valuable than science) were to halt tightening emissions regulations aimed at reducing carbon dioxide emissions, stopping this tr end would be like swerving a Titanic away from that (rapidly melting) iceberg given the degree in which car companies have already invested billions in making battery technology a reality over the next decade.

This doesn’t mean the end of the internal combustion engine (ICE) even into the 2030s, with the BMW Group and Volkswagen Group forecasting that up to 25 per cent of their global volume will feature electrification by 2025. And for perspective, the Renault, Nissan and Mitsubishi Alliance sold the most vehicles of any conglomerate last year with 10.6 million units globally … only 91,000 of which were EVs. But given that 1.2 million electrified vehicles sold worldwide in 2017, that’s almost one in 10, and it tips its own volume of electrified models will multiply 10-fold to 1m units by 2022.

The question, then, is not if car companies will move to alternative powertrains, but when? Who has laid chips in plug-in hybrid and electric-only technology, who is toying with hydrogen, and is anyone keeping the old ICE churning and burning?

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New-car buyers are paying $20,000 more for a vehicle than used-car buyers, and while people aged over 65 prefer to leave a showroom in new wheels by a factor of almost two to one, Generation Z is saving its cash, with most opting for secondhand.

The average spend on new cars is $33,650, compared with $14,184 for used cars, according to a survey of more than 1000 people by ME Bank.

And while at least two in three Generation Z respondents (aged 18 to 24) bought secondhand, many said they “would feel embarrassed driving a used car”.

Almost two thirds of respondents failed to identify depreciation as the biggest cost of owning a new car in the first three years, including 86 per cent of Generation Z.

Matthew Read, a spokesman for ME Bank, said a factor that may explain the popularity of new cars is that many owners mistakenly think they cost less overall to run and maintain.

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It’s a rule that’s probably buried somewhere in Donald Trump’s bile-filled Art of the Deal, if you can bear to read his books – “anything that sounds too good to be true, almost certainly is”.

So if you’ve seen an advertisement promising “0% interest”, “0% car finance”, or even the slightly less-generous sounding “1% finance car deals”, immediately grab your reading glasses and prepare to start scouring the fine print.

Because the fact is that 0% finance new cars can actually be more expensive to buy than the same car bought with a standard finance interest rate.

When you see an offer like “Toyota 0% financing”, it sounds like a hell of a deal, but that’s what it’s designed to sound like. Basically it’s all about getting you into the showroom.

What you need to look at is the bottom line, and the math here is fairly simple. If you can buy a car with a normal finance deal, at say 8.0 per cent, for $19,990, that’s still going to be cheaper than buying one at 0 per cent if that same car costs $24,990 under your “special” 0 per cent deal.

Because this is what car companies will sometimes do, basically as a way of recouping the cost of offering you “BMW 0% finance”, for example. They give you the low rate, but bump up the price of the car, or add on extra fees, delivery costs and charges. Again, it’s all about reading the fine print.

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ANZ’s former car loan business Esanda was riddled with misconduct, the royal commission has heard, including dealers pumping up interest rates to get commissions and brokers swapping customer’s financial information with that of their guarantor to get loan approvals.

ANZ’s breaches of responsible lending requirements in its car finance business also ran to an alleged fraud involving a group of three dealers who supplied Esanda with fake payslips and bank statements to secure customer loans, the commission was told on Thursday.

The bank this year admitted to 24 breaches of responsible lending laws within its car loan business and paid a $5 million fine. ANZ sold its $8.2 billion Esanda Dealer Finance portfolio in October 2015 to Macquarie Group. It told the market at the time the sale was due to the business no longer being core and following new global capital requirements to ensure financial stability of the world’s banks.

Last week, ANZ announced it was suspending its consumer car finance products while it reviewed the business. Counsel assisting the royal commission, Albert Dinelli, pressed the bank’s general manager of small business banking, Guy Mendelson, about the reason for the sale.

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Australia’s largest provider of auto loans accepts customer information provided by car dealerships as gospel and does not independently verify the expenses – and in some cases income – of loan applicants.

The Hayne royal commission heard from Nalini Thiruvangadam on Wednesday about her experiences with car finance provided by Westpac. The part-time carer and recipient of Centrelink benefits was approved for a loan after submitting an application stating she had zero expenses.

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Westpac has told the banking royal commission a Bank of Melbourne car loan granted to a carer in 2012 which she could not afford to pay back would not have been approved today.

Nalini Thiruvangadam told the commission she had wanted to buy a new car for her job looking after elderly people because her old car caught fire while she was driving, but she could not get a bank loan because of an unpaid credit card.

The personal care attendant found a car dealer about 50 kilometres from where she lived who agreed to give her a car loan despite her fortnightly income of $350 from her job as a personal care attendant and $600 from Centrelink benefits.

She also paid rent of about $1,000 a month.

Ms Thiruvangadam said she was kept at the car dealership for about two hours into the night while she waited to sign the loan documents.

The mother of two did not realise until she got home and read the loan documents that she had bought a used car, a demonstration model Ford Focus, with lots of mileage and which stalled regularly.

The car dealer refused to cancel the loan, saying Ms Thiruvangadam had already signed the documents even though she said she could not afford the payments of $259 a fortnight.

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A whopping $8.5 billion was borrowed to purchase new cars just in the past year.

Aussies love new cars and it appears we don’t shy away from car loans to finance our purchase. A finder.com.au analysis of Australian Bureau of Statistics (ABS) data has found that in the 12 months to November 2017, there were 1,182,631 new cars sold and 236,451 had car loans attached to them.

That’s 1 in 5 new cars that were purchased with a car loan during that period, totalling $8.5 billion lent.

With the average car loan interest rate being 6.3% p.a. and the average financed car selling for $35,797, we found that around $536 million will be paid in car loan interest in 2018.

While this sounds like a lot, car loans can be one of the cheapest ways to finance a new vehicle purchase. As the car is used as security interest rates are extremely competitive. Some lenders can offer interest in the 5% p.a. range, which is much more competitive than what you will find for an unsecured personal loan which can have interest rates of between 10-20% p.a.

However, there are other financing options new car buyers can consider, such as dealership finance.

One point to remember when selecting finance to help purchase a new car is depreciation. While you’re still paying off the original value of the car, your vehicle will be losing value. So make sure you select the shortest loan terms you can afford and choose a loan that will be flexible to your circumstances.

However, ABS inflation data shows cars are getting more affordable. A car that would have cost you $20,000 in the year 2000 would only cost $16,753 now – a drop in price of about 16%.

And with 2017 being a record year for car sales in Australia, we certainly are taking advantage of the affordability.

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The world of car finance can be a hugely confusing place to anyone not sporting an economics degree (or the surname Koch).

For a start, it’s like they’re all speaking some strange and alien language, with terms like comparison rate, principal, redraw and payment schedules all thrown about while we normal, non-finance folk smile politely and get more and more confused.

Plus, there are more ways to borrow money than ever before, from personal debt to secured loans and even low-rate credit cards, so it’s near impossible to know at a glance which option is best for you.

Is the lowest rate always best?

The easiest and most obvious choice, of course, is to pick the deal that offers the lowest interest rate (meaning you’ll pay the least amount of interest over the duration of the loan), but hard though it might be to believe, that’s not always the best option.

Because when it comes to car finance, the devil is in the detail. And while a rock-bottom rate is obviously appealing, most experts agree that flexibility is priceless in the car-loan process.

“If you’re in the market for a car loan, interest rates are just one component – and they are important – but equally important are the fees. They can have as much of an impact on the total cost of a loan as the interest rate,” says Mitch Watson, a research manager at financial comparison website Canstar.

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