Financing a car in Oz? You need to read this!
Today, October 30th 2018. I received 3 calls from 3 different customers looking to finance their new car. This in itself is not unusual as this is my job, however the calls themselves was unlike any I've had before.
"Tony, I'm looking for a new Isuzu D-Max and I've spoken to 3 dealers all who have given me an interest rate of 7.5% - This is ridiculous! They are all trying to screw me and make as much money from me. They are telling me its because legislation has changed and they don't care about who I am anymore. I have 2 properties, excellent credit score and make a heap of money every month which I can prove. My last loan was 6%! What can you do for me?"
Normally I get calls from dealers trying to gouge customers but usually I don't customers telling me they cant get a better deal after calling 3 dealers. I had 3 similar calls today. So whats changed?
Well for those that aren't aware as of the 1st November 2018 ASIC has banned the use of "Flex commissions" Flex commissions are a method of paying a commission to the introducer (car dealer, broker or bank employee credit representative) for selling a finance rate higher that the "base" rate the lender had a available. ie if the base rate was 5% and the finance was sold to the customer at 5% no commission is payable to the introducer. If the finance the customer purchased was at 7% and the base rate was 5% then the introducer would get paid a percentage of the interest earned on that difference. As of the 1st of November finance companies now set the "customer rate" which an introducer cannot discount by more than 200 basis points. ie 7.00% cant go lower than 5.00% but can go 6.76% for example. If it is discounted then a reduced commission will be paid. Sounds alright doesn't it?
ASIC Introduced these laws as they felt vulnerable consumers we getting charged unfairly by finance business introduced at car dealerships. It is right that some customer were charged unfairly, maybe only because they were poor negotiators however this has now had an undesirable effect on what we would call "Prime" borrowers. A prime borrower is a customer who usually has the following attributes: Property owner, excellent credit score and credit history, long time stability in residence, long time stability in employment, some savings and little other debt apart from a mortgage, surplus disposable income after factoring all expenses and the new loan repayments. This customers might have been offered rates as low as 4.6% in recent times. With the cost of financing now going up quite considerably even for these prime customers the rate they may be offered will now be 6.99-7.50%.
The majority of the market has already switched to the new model. Some of the changes I have personally seen that concern me are older vehicles. Most customers that are after a vehicle of 7+ years of age generally are not in a good financial position from the customers that we see. Generally young, or part time, or on government benefits or credit impaired. They generally are looking at spending less than $20,000. I had one lender that in this situation if they were living at home, looking at a 10 year old car and working full time I could offer them a loan at 9.99%. Since that very same lender made changes to be inline with the new legislation where risk based pricing is preferred the customer rate is 18.99%. so the best I could do by reducing by 200 basis points is 16.99%. How is this customer better off? There are other lenders that will now be better than this option
The new legislation is a great initiative for fairer financing of vehicles based on the individual applicant and their circumstance. Some people will be winners and some will be losers as with anything. What I have learnt is that now its more important than ever to compare your options and don't always go with the dealer just because it's convenient. You might find you may now save thousands (more) by consulting a broker who can compare all your options. If the dealer option is best for you then at least you know you have the best deal available.