By Cullen Haynes - Asset Finance Specialist
In this month’s Legal Home Loans blog we wanted to cover some important developments in the asset finance space. This is an important development particularly for our lawyer clientele who, as low risk applicants, stand to reap the benefits of lower interest rates. In a nutshell, there have been some major changes in the asset finance space with a move to what is termed “risk based pricing”. We wanted to take the time to outline what these changes mean and take the mystery out of interest rates within asset finance loans more generally.
So, what has changed and how will this benefit lower risk profile applicants like lawyers? The old method of setting interest rates for asset financing involved a practice known as Flex Commissions which were paid to operators/dealers. In simple terms, this involved the lender or financial institution setting a base rate and then depending on the financial acumen of the borrower, the operator or dealer would then set the final interest rate. The Flex Commission is then calculated as the difference between the former rate and the latter which is what made up the Flex Commission. So why was this a problem for consumers?
Well, this sort of system lent itself to unethical practices and sales tactics which is why ASIC stepped in with this particular reform. For example, ill informed or inexperienced consumers often fell prey to sales tactics designed to maximise the differential explained above and thereby increasing the Flex Commission paid to operators/dealers. For example, an operator might ask a borrower “how much can you afford in terms of monthly repayments?” Based on the response, the rate would typically increase from the base of 6% set by the lender to rates in the 12-14% range. It’s not hard to see how borrowers might get a raw deal in this type of scenario especially if they don’t know the ins and outs of how rates are set. This process clearly lacked transparency. These types of scenarios and price gouging basically allowed the dealer to get the rate above the base on a loan-by-loan basis, solely based on their assessment of the risk profile of the applicant.
Now it’s also important to note that not all dealers operated like this, however it was a practice that came under the spotlight during the recent Royal Commission into the banking sector. ASIC’s ban on Flex Commissions has come into effect this month and will mean significant changes around how rates are set with a move to a new “Risk Based” model which offers more transparency to consumers, but most importantly, it should mean lower interest rates all round for low risk profile applicants and borrowers (like lawyers). The main issue here was that few if any consumers actually knew about the Flex Commission arrangements that were in place between banks and operators. The objective of the move to a risk based model will give consumers more certainty around how interest rates are set as well as being more transparent.
So how does a “Risk Based” model work? For a start the lender is the one that will set the base and final interest rates based on an assessment of three main factors:
● The loan to asset value ratio - LVR
● The age of the asset
● Security in the way of property
Some other factors might also be taken into account but these are the three major areas that will be assessed in determining interest rates. For example, let’s say an applicant for finance has a lower loan to value ratio, is buying a brand new car and owns a home or investment property. They will be assigned a lower interest rate than an applicant that has a higher LVR, is buying an older asset and perhaps doesn’t own a property. What does this mean for our client base?
We deal with legal professionals, and the changes outlined above will mean lower interest rates on your asset finance loans. Why? Because you will likely have a risk profile that works very well with the risk based assessment model meaning lenders will likely offer you lower rates. Whereas before, your capacity to pay often meant even higher rates (owing to the Flex Commission incentives). This perverse incentive has been removed so that now both lenders and borrowers are clearer on where they stand. Low risk borrowers are rewarded, the borrower’s loans are more secure as a result of better lending practices and operators also have more certainty around their commission structures not to mention reducing their risk of being caught up in consumer complaints and potential litigation.
If you are looking to secure some asset financing as a consumer or commercial client, Legal Homes Loans have specialist asset finance brokers on hand who can help you navigate this complex landscape. Now is a good time to take advantage of lower rates. We cover all manners of asset financing including coordination of car sourcing, whether it be new or ex-demo for fleet listed pricing.
For business and firm owners who have an ABN, 12 months of GST registration and own property, we have products offering $100,000 pre-approval for up to 6 months with a credit limit. If the vehicle being purchased is for business use, law firm partners or directors can be pre-approved for up to $150,000. ABN holders can also receive Qantas Business Rewards points—1 point for every dollar spent. A $60,000 vehicle translates to a one-way ticket to London!
Contact us to arrange a quick meeting in the CBD—we are always happy to have a coffee and run you through your options as well as outline some of the great products and savings we can offer our clients in the legal profession.