THE world of car finance changes dramatically from midnight tonight, potentially saving buyers thousands of dollars in loan repayments.
Stricter regulations on finance for new and used cars will give buyers the upper hand on interest rates — and slash the kickbacks paid to dealers by lenders.
Under the previous rules, a dealership was allowed to add hefty margins on top of the lender’s rate in return for a bigger kickback.
According to one example provided by a leading multi-franchise dealer, if the lender’s finance rate was 5 per cent interest but the dealer could sign up the customer at 12 per cent, the dealer could reap a kickback of about $10,000 on a loan for a $50,000 car. That’s in addition to the dealer’s profit from the sale of the car itself.
Under new regulations, dealers will not be allowed to increase the interest rate quoted by the lender — instead they can only use their discretion to reduce the interest rate by a maximum of 2 per cent.
For example, if the finance company sets the interest rate on a car loan at 8 per cent, the dealership can cut the rate to by up to 2 per cent — to 6 per cent, in this example.
However, the dealer only gets their full commission if the customer signs up at the original quoted rate. The kickback paid back to the dealer gradually reduces as the interest rate goes down.
“Most dealers won’t roll back that 2 per cent because there’s just not that much (profit) margin in the car or the finance any more,” said one leading metropolitan dealer.
“What it means is the finance rates across the board will be fairer for more buyers with a good credit history,” the veteran dealer said.
“The downside is the loan approval process will take longer and customers will be asked more questions, but successful applicants will save thousands off their loans.”
Another major multi-franchise dealer said buyers with a poor credit history will find it harder to secure a loan and will pay higher interest rates. They forecast up to one-in-four loan applications will initially get knocked back.
“If you have a poor credit score it will set off alarm bells,” the dealer said. “The industry now must give each customer a personalised 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.”
Industry sources say about 80 per cent of new cars bought privately are purchased under finance — and about half of that is finance arranged by the dealership.
The industry predicts the new regulations regarding vehicle finance will initially dent dealership profit by between 10 and 20 per cent, because of the reduction in kickbacks from finance companies.
“Over time, though, I think we will make up that shortfall,” said a representative from a third dealership group contacted by News Corp Australia.
“We expect to make less commission off each finance deal but our hope is that more people will take up the finance offers now that rates have effectively come down.”
Currently, two large automotive lenders — St George and Macquarie — dominate the car finance sector.
However, a number of car companies also have finance divisions, including Toyota, Holden, Nissan, Volkswagen, BMW and Mercedes.
Other leading car companies add their own brands to finance packages that are in fact underwritten by St George or Macquarie.
The boss of Toyota Australia’s financial services division, John Chandler, welcomed the new regulations and said competition in the car lending sector would help keep interest rates low.
“We have the same credit rating as the major banks … so we can position ourselves alongside them,” said Mr Chandler.
Toyota finance can also be used to buy a car from a rival brand — if purchased through a multi-franchise Toyota dealer.
The new regulations restricting interest rate manipulations by a dealer apply only to private buyers.
However, Toyota says it will apply the same criteria to loans for small business fleets, which do not fall under the new regulations.
“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 Mr Chandler.