Is the recent ban on flex commissions for car loans a good thing for the lending industry? All things considered, it is. There are a number of positive outcomes for brokers and lenders. In particular, private lenders throughout Australia have good cause to be optimistic.
The ban at a glance
But first, let’s backpedal a bit. The ban came into effect in early November 2018 and was orchestrated by ASIC. Up until the ban, lenders paid “flex commissions” to car dealers and finance brokers for loans on motor vehicles.
ASIC has plenty of evidence that these flex commissions actively deterred car dealers and finance brokers from offering car loans at reasonable interest rates. In fact, the flex commissions incentivised both dealers and brokers to offer consumers sky-high rates of interest, so that earnings from commissions could be maximised.
The result was that many borrowers ended up paying excessive rates of interest on their car loans.
ASIC had particular concerns about less financially-savvy consumers who were not in a strong position to negotiate favourable interest rates. The ban provides greater transparency and fairness on the pricing of car loans for everyone.
Flow on benefits for brokers and lenders
Thanks to enhanced pricing transparency and overall improvements in lending efficiency and consistency, there will be flow on benefits to brokers and lenders.
ASIC’s moves to standardise the pricing of car loans means that brokers can now arrange car finance with more certainty than ever before. Brokers can now even compete directly with dealership finance in car yards. Indeed, many customers prefer private lenders and brokers over car dealership financiers, perceiving the latter as having a reputation for unethical lending practices.
And because car loan interest rates will now be set in accordance with the borrower’s financial position and credit score, both brokers and consumers will spend less time haggling over lending interest rates.
For brokers, this means that they can spend more time on creating new opportunities for broadening and diversifying their revenue stream. Asset and equipment finance are two areas they should be turning their attention to. Many businesses rely on having the latest equipment to remain competitive – equipment finance can have huge benefits for these operators.
How can brokers diversify?
Diversifying in the lending sector is simpler than many may think. For a start, the fundamentals are strikingly similar. Brokers who invest time in understanding their client’s needs and current financial position will always be at an advantage.
A number of successful lenders and brokers use car financing as a gateway to arrange other types of loans for their clients. By offering better financial solutions and building strong relationships, these lenders and brokers find that their clients come back for more, or refer family and friends, when other credit needs arise.
In the end, diversifying isn’t about having a complicated game plan. It’s about making a commitment to being well-informed, making contacts and thinking outside of the box.
Measures such as the ban on flex commissions should be regarded as an opportunity to improve revenue streams and enhance relationships with consumers, rather than obstacles of any kind.
