Take the wheel on car loans

HERE is good news for car buyers. Our money watchdog ASIC has cracked down on socalled “flex” commissions paid to car dealers, putting motorists in a better position to secure competitive finance at the car yard.

Flex commissions are paid by lenders to car finance brokers — typically car dealers.

The problem with flex commissions is that they allow dealers to arrange car loans at a higher interest rate than the lender’s lowest available rate.

As a guide, ASIC found a car dealer could decide whether a customer would be charged an interest rate of 7 per cent — or 14 per cent — regardless of credit history. The dealer is then paid a commission based on the difference between the lender’s base rate and the interest rate sold — the “flex amount”.

The higher the rate, the larger the commission. But for car buyers, this system can mean paying thousands of dollars more in interest over the life of the car loan.

The ban on flex commissions makes lenders more responsible for determining the rate that applies to a particular car loan.

The dealer cannot suggest a different rate that earns them more commission. Car yards will even have some capacity to discount the interest rate, presumably to secure a sale, potentially leading to lower costs for car buyers.

The ban highlights the importance of shopping around for finance before you hit the car yards. Failure to do so can significantly add to the amount paid for a vehicle.

By way of example, on a car costing $25,000, using a fiveyear loan with a rate of 12 per cent, you can expect to pay total interest of $8366. However, a quick look at comparison sites, such as Finder, shows a reasonable selection of car loans are available costing 8 per cent (in some cases less). A five-year loan on the same car would cut your interest bill to $5414 — a saving of $2952.

Opting for the shortest financing term your budget can handle is another way to trim interest charges.

Take a look at ASIC’s MoneySmart Cars app. It is free to download, and it can help you avoid common traps and identify hidden costs.