How a Car Finance Broker and a Bank Are Paid, and When Each Suits

This article provides general information only about arranging finance for a car in Australia. It does not constitute financial or credit advice, and it does not take account of the objectives, financial situation or needs of any individual reader. Rates, fees and lending criteria differ between lenders and change over time, and a reader who requires advice about a specific loan is advised to consult a licensed credit provider or a financial counsellor.

The position taken here is that neither a broker nor a bank is better in every case. A car finance broker may be useful where the buyer’s circumstances are not standard or where time is limited. A direct application to a bank, credit union or other lender may be simpler and perfectly adequate where the buyer’s circumstances are straightforward. In both cases the comparison that matters is the total cost of the loan, and any claim that one route always produces a lower rate should be treated with caution.

1. How each route works

1. A direct lender (a bank, credit union, mutual bank or finance company) offers its own loan products. The buyer applies to that lender, and the lender decides on its own criteria and at its own rates.
2. A broker arranges credit on the buyer’s behalf with a lender on its panel. A broker is not the lender and does not decide whether the loan is approved. The lender makes that decision.

A broker’s panel is a limited list. It does not necessarily include every lender in the market, and the lenders on it are those the broker has agreed to work with. Whether a particular lender is on the panel, and how many are, are fair questions to ask.

2. How each is paid

The payment arrangements are the point on which the two routes differ most, and the point most often left out of promotional material.

1. A direct lender earns its return from the interest and fees on the loan.
2. A broker is commonly paid by the lender, usually as a commission for arranging the loan, and may also charge the buyer a fee. The arrangement varies between brokers, and a buyer is entitled to ask what the broker will receive and from whom.
3. Where a car is financed through a dealership, the dealer or its finance arrangement may also receive payment from the lender. The Australian Securities and Investments Commission (ASIC) has banned so-called flex commission arrangements in car finance, in which the person arranging the loan could vary the interest rate to increase their own commission, so a buyer should not encounter that model in a regulated transaction.

A commission paid by a lender does not by itself make a recommendation poor, and an absence of commission does not by itself make a recommendation good. The relevant point is that the buyer should know about it, so that the recommendation can be weighed accordingly.

3. What regulation applies

1. A person who arranges consumer credit for a fee or commission must generally hold an Australian credit licence or act as a credit representative of a licensee. Both the licence status and the licensee’s name can be checked on ASIC’s registers.
2. Licensed lenders and brokers are subject to responsible lending obligations under the National Consumer Credit Protection Act 2009, which broadly require them to make reasonable inquiries about the borrower’s requirements and financial situation and to avoid arranging or providing credit that is unsuitable.
3. A best interests duty was introduced for mortgage brokers. Whether a comparable duty applies to the credit being arranged for a car is a matter that the reader should confirm with ASIC or the broker, and the duty should not be assumed.
4. A buyer who is unhappy with how a lender or broker has dealt with them may make a complaint to the firm and, if it is not resolved, to the Australian Financial Complaints Authority (AFCA), which provides a free external dispute resolution service.

4. How to compare offers

Whichever route is used, the following steps allow offers to be compared on the same basis.

1. Obtain each offer in writing, with the loan amount, term, repayment frequency and whether the interest rate is fixed or variable.
2. Compare the comparison rate, which includes most fees and charges in a single figure. A comparison rate is calculated on a standard loan amount and term, and it may not reflect events such as early repayment, so it is a guide and not a final cost.
3. Ask about establishment fees, ongoing account fees and early repayment or exit fees.
4. Ask whether the loan is secured on the vehicle, and whether any balloon payment (a lump sum due at the end of the term) is included. A lower repayment may reflect a larger final payment.
5. Identify any add-on products, such as insurance, that have been included in the amount borrowed, and ask whether they are optional.
6. Calculate the total amount repayable over the term, not only the regular repayment.

Total cost also includes items outside the loan, such as insurance, registration and servicing. Our piece on judging a mechanic's explanation over the price is relevant to the running cost side of that picture.

5. When a broker may be suitable

1. The buyer’s income or credit history is not standard, such as irregular earnings, and the buyer wants an adviser who knows which lenders consider such cases.
2. The buyer has limited time and wishes to have the comparison and the paperwork handled by a third party.
3. The buyer wishes to compare several lenders without making separate applications.
4. The buyer is financing a vehicle for business use, where the structure of the loan may matter. Readers in that situation may also consult our guide to truck loans for owner-drivers for the commercial side.

A reader considering a broker may ask the following questions: which lenders are on the panel, how the broker is paid and by whom, whether any lenders pay a higher commission, and what will happen to the fee if the loan does not proceed.

6. When a direct lender may be simpler

1. The buyer has a stable income, a sound credit history and a long-standing relationship with a bank or credit union.
2. The buyer’s own lender offers a secured car loan with a competitive comparison rate and no unwanted features.
3. The buyer prefers a single point of contact and is comfortable reading and comparing product documents.
4. The buyer has already obtained two or three written quotes and the direct offer compares well with them.

Direct applications also carry their own cautions. A buyer who approaches several lenders in a short period may leave multiple credit enquiries on a credit file, and a lender’s first offer is not necessarily its best. It is reasonable to ask whether the rate offered is the lowest the lender can provide for the loan.

7. Choosing between the two

For a buyer with a standard profile, a practical course is as follows.

1. Obtain a written quote from the buyer’s own bank or credit union.
2. Obtain at least one other written quote, from a second lender or a broker.
3. Compare the comparison rate, fees, term and total repayable, and ask any broker about commission.
4. Choose the offer with the lowest total cost that meets the buyer’s needs, and decline any add-ons that are not wanted.

For a buyer with a non-standard profile, the sequence is similar, but the second quote is likely to come from a broker with access to lenders that the buyer’s own bank may not consider. In neither case is a broker’s involvement a substitute for reading the contract.

A reader who requires an assessment of a particular loan is referred to ASIC’s MoneySmart website for independent guidance, or to a financial counsellor, and to the licensed lender or broker for a quote that takes account of the reader’s circumstances.

Sources: ASIC MoneySmart, car loans and comparison rates (https://moneysmart.gov.au/loans/car-loans); Australian Securities and Investments Commission, credit licensing and registers (https://www.asic.gov.au/for-finance-professionals/credit-licensees/check-if-you-need-a-credit-licence); National Consumer Credit Protection Act 2009, Federal Register of Legislation (https://www.legislation.gov.au/C2009A00134/latest/text); Australian Financial Complaints Authority (https://www.afca.org.au)