If you’re in the market for a car loan and wondering where to start, one option could be to approach your existing bank directly. Another could be to negotiate with a salesperson at a dealership to see what kind of deal you can get. While these are both tried and true pathways to car financing, going directly through a bank or dealership could mean that you miss out on a loan with a competitive rate, or one that may be very well suited to your particular needs and circumstances. This is where some people may choose to speak with a car loan broker.
If you’ve never used a car loan broker before, or are just curious about what they do, we’ve broken down the basics for you, as well as the potential benefits and drawbacks of working with one. In this article, we’ll consider:
What is a car loan broker?
A car loan broker acts as an intermediary between individuals who wish to take out car loans, and institutions such as banks and other finance providers. A broker’s job is to consider the various loan products on the market, and to work with consumers by recommending loans that are suited to their particular budget, needs and situation.
How do car loan brokers work?
A car loan broker will typically work with a ‘panel’ of lenders ‒ this is a group of lenders, including various banks and individual loan providers. If you sign up with a car loan broker, they will consider your particular needs against their lenders’ various offerings and find a suitable loan product or products that they will then recommend to you.
What are the benefits of a car loan broker?
The potential benefits of obtaining finance through a car loan broker include convenience, access to a range of lenders and products, the protection of Australian consumer law and the potential to better safeguard your credit score.
They can offer convenience
One benefit of a car loan broker is convenience. The marketplace for car loans can be crowded, and if you do not have the time to sort through a large number of finance options, a broker can take care of the legwork. Car loan brokers are also able to assist customers with the application process, which can save time.
They have access to an array of products
If you choose to apply for car financing through a dealership or through a bank where you typically do business, you may find that you are limited in terms of the available options. In contrast, many car loan brokers have relationships with a wide array of banks and individual lenders, meaning they may be able to offer you more options to compare.
They can have access to more competitive interest rates
If a car loan broker has established relationships with a variety of lenders, it may also be the case that they have access to ‘wholesale’ interest rates. Wholesale rates can be lower than rates that a lender might offer directly to borrowers, which might potentially save you money.
They are bound by responsible lending laws
Car loan brokers are currently bound by Australia’s responsible lending laws, and are required to hold an Australian Credit Licence (ACL) or to operate under another credit licence as an authorised credit representative. The National Consumer Protection Act 2009 requires that a licence-holder does not enter into a contract that’s unsuitable for a consumer based on their situation. For example, in an initial assessment, the contract can be considered ‘unsuitable’ if it’s likely a person won’t be able to meet their financial obligations, or could only meet them with substantial hardship, or if the contract won’t meet a consumer’s requirements or objectives.
This means that a car loan broker is required by law to consider your needs and circumstances when making their recommendations, and must not enter into a credit contract with you, suggest a credit contract to you or assist you in applying for one if that contract is unsuitable for you personally.
They can help you maintain your credit score
If you have applied and been knocked back for a number of loans, you may find that your credit score is negatively affected. Working with a broker could mean you receive assistance in your application, thereby increasing your likelihood of getting it right and helping to maintain your credit score. If you already happen to have a low credit score, a personal loan broker may be able to assist you by suggesting lenders who may be more likely to consider your application.
What are the drawbacks of a car loan broker?
Working with a broker can come with some drawbacks. These include the fact that they may prioritise their commission, there may be hidden fees, they may have a limited panel of lenders, and the process of negotiating for a loan may not be transparent.
They may prioritise their commission
Many car loan brokers work on a commission basis ‒ this means that a lender will pay them a commission for referring you as a customer. Under Australia’s responsible lending guidelines, car loan brokers are required to disclose any ‘indirect remuneration’ they are likely to receive from referring you to a lender, which includes commissions.
This means that, if faced with a choice between two suitable lenders, they may well recommend the one that pays them a higher commission, even if the deal ends up being less favourable to you. By law, they will still be required to disclose the commission they receive, but if you are concerned, it may be worth asking if there are other, potentially more favourable deals available.
There may be hidden fees
While car loan brokers work on a commission basis and typically do not charge direct fees, there may be some hidden fees built into the price you eventually pay for your car. A car loan broker who has a relationship with a dealer might charge that dealer a commission, and then the dealer may pass that onto you as part of the overall cost of the car.
Their panel of lenders may be limited
Car loan brokers will typically have a panel of various different lenders, like banks and individual loan providers, but their scope may still be limited. It’s worth keeping in mind, though, that any one broker may only have a small panel of lenders, and there are certain lenders who may not work with brokers at all, meaning that there may be a more favourable deal for you elsewhere on the market.
Before you decide to work with a broker, it’s important to do your own research into car loans on the market. You can compare car loans with Canstar, and find out how much you might save with a 5-Star Rated personal or car loan.
The process may not be transparent
Working with a car loan broker can be convenient, as it means you will not have to deal directly with lenders yourself, and the broker will negotiate a rate for you. The convenience of not having to negotiate directly with a lender may appeal to some people. If you like to roll up your sleeves and talk business, though, you may be concerned that you could have negotiated a more favourable rate, had you dealt directly with the lender instead.
What questions should you ask a car loan broker?
Here are five questions to start a discussion with a car loan broker, if you are considering taking out a loan.
- How many lenders do they deal with? Generally speaking, the more options a car loan broker can offer you in terms of lenders, the better. If a broker only recommends products from two or three lenders, there may be limited advantage in choosing to use their services.
- How are their commissions structured? It may be worth asking if a broker is paid by particular lenders for referring your business to them, and if so, whether the payment is a one-off or will be paid to them on a recurring basis as long as you have the loan.
- What are the terms and conditions of the loan? Loans come with terms and conditions ‒ these can include the repayment period for the loan, whether the rate is fixed or variable, and any other penalties or special conditions that may apply. It is important to ask your broker about this information to get an understanding of the loan you’re signing up for. If the broker is unsure of anything and you have questions about the terms and conditions of a loan, you can also speak with a lender directly and find out more details.
- Are there any fees you should know about? While a car loan broker might not charge you a fee directly, dealers who pay a commission to brokers can pass the cost of that on to you by building a fee into the price of a car. For this reason, it can be worth asking a broker about any hidden fees that might apply.
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