ASIC ends dealer finance rip-off

The Australian Securities and Investments Commission (ASIC) has lowered the boom on shonky finance transactions by licensed motor car traders.

Effective from November 1, new legislation restricts the setting of interest rates for car loans to the lenders. No more will a dealer set the interest rate for car loans arranged by a customer purchasing a vehicle at that dealership.

The legislative change, which will likely have a profound effect on the 65,000 Australian consumers who purchase a new or used car each week, follows the recently concluded Royal Commission into the Banking, Superannuation and Financial Services Industry.

According to ASIC, the 'flex commissions' offered by financiers were directly proportional to the interest rate set – and the finance brokers (more often than not dealers) were permitted to charge whatever interest rate the retail consumer would accept. Under the previous system there was little if any accountability for dealers arranging car finance and overcharging customers in the process.

"We found that 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," explained ASIC Deputy Chair Peter Kell.

The move away from 'flex commissions' paid to dealers by lending institutions has been years in the making, according to John Chandler, CEO of Toyota Financial Services (TFS). Chandler says that abolishing those commissions and withdrawing from dealers the provision to set interest rates will inevitably improve the 'customer experience'.

"This legislation represents the next step in the evolution of purchasing a vehicle, which we regard as a welcome change," Chandler was quoted as saying in a press release.

TFS has implemented a new 'personalised' method for determining the interest rate payable by a customer, based on the customer's credit score and 14 other criteria applied by the company. These criteria include marital status, address, age and occupation as examples.

"We think the personalised rate approach will be more accurate and will provide our customers with a more appropriate interest rate as it is based on their individual circumstances, rather than a rate card, which places customers in broad interest rate bands," said Chandler.

What this change has revealed to companies like TFS is that Australian consumers are essentially suckers when it comes to knowing their credit score, for instance. In a recent survey conducted for TFS, only 26 per cent of respondents knew what their credit score was. Over half believed that a score of 656 is 'good' – out of a possible maximum score of 1200.

Only 38 per cent of consumers locked into a car loan can recite the interest rate for the loan, yet 90 per cent of vehicle purchasers rely on finance to acquire the vehicle. Despite the prevalence of flex commissions and dealer-set interest rates, 61 per cent of respondents surveyed believed they had negotiated the best price available.

And sadly, wisdom doesn't come with age, with 55 per cent of 18-34 year olds believing they were paying at the lowest possible rate – versus 78 per cent of consumers aged above 50.