The big changes coming for dealer-financed car loans

If you've never heard of "flex" commissions, you are among the vast majority of people, and it is hardly surprising.

That's because flex commissions wouldn't exist if consumers knew about them.

Most people know that car dealers sell on-the-spot financing.

Cars are an emotional purchase made outside normal bank hours. In the excitement of the new car moment and to assure the "great deal", immediate finance approval leads some car buyers to suspend their normal judgement and take whatever is on offer.

Most people would expect the dealer to receive commission on the loan.

What surprises is that the dealer can set a higher interest rate than the lender's base rate, earning higher commission. That "flex" commission, sometimes up to 80% of the increased interest, is quite an incentive to the dealer. It can mean very high financing costs for the borrower.

Last year the regulator ASIC formally banned flex commissions.

Effective from November 2018, lenders, not car dealers, will have responsibility for determining the interest rate. The dealer cannot suggest a different rate that earns more commissions but has limited capacity to discount it and receive lower commissions.

The changes will protect car buyers from very high interest rates, determined opportunistically at point of sale. Of course, dealers will see their commissions cut, potentially meaning higher car prices but far more transparency for the buyer.

Is it enough to protect consumers? No, even when flex commissions disappear, buyers might still be offered an interest rate that is too high.

There is only one way to protect yourself and that is to compare the loan offered with others available to you. How do interest rates, repayments and fees compare, remembering "apples with apples"?

Finally, don't get carried away in the moment. Take time to read the contract and if you don't understand it take it away and seek expert help.

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