New Auto Finance Legislation in Australia Takes Effect
2018-11-14 09:59 Wednesday
Australia recently implemented new regulations for auto finance which will grant new and used cars buyers more initiative on interest rates, a development that is expected to save consumers from troublesome loan burdens.
Under the previous rules, it was legal for a dealer to add substantial margins on top of the lender's rate. For instance, if the lender's set an interest rate at 5%, the dealer could sell to the customer at a rate of 12%.
Under the new regime, dealers will not be allowed to increase the interest rate, but will have the discretion to reduce interest rates by up to 2%. If the finance company sets the interest rate for a car loan at 8%, the dealer can cut the rate to 6%, but no further. If a customer opts to purchase the car at the original loan rate, dealers can only receive the full commission without any kickbacks.
"Most dealers won't roll back that 2 % because that means reduced profits, and the finance rates will be fairer for more buyers with a good credit history", said one prominent dealer.
"The downside is the loan approval process will take longer and customers will be asked more questions, but successful applicants will save thousands of their loans. However, loan application from customers with poor credit score may be rejected", a banking industry professional noted.
"The industry now must give each customer a customized interest rate, and there comes a point when the interest rate will be so high for some buyers that the loan won't be approved, to protect the consumer", another source from within the industry explained.
It is projected that the new regulation will initially slash dealer profits by between 10 and 20%, because of the reduction in kickbacks from finance companies.
"Our hope is that more people will take up the finance offers now that rates have effectively come down", a veteran dealer stated.
John Chandler, the Head of Toyota Australia's Financial Services Division, supports the new regulation and believes that competition in the car lending sector would help keep interest rates low.
However, loan criteria for small business fleets were not affected by the new regulation, so Toyota will maintain the same interest rates for small businesses.
"We don't want any difference between a (customer) who comes in, regardless of what they use the car for. Small business is so important to the economy, important to us, and important to dealers," said Chandler.