How does a finance broker hide their commission?

A broker gets paid a commission from the income that the bank generates. So they get paid from the interest charges.

So let’s say you ask a broker for an interest rate, they say 5.00%. Does that include the commission?

Probably not…

They are probably quoting you the base rate, which is the interest the bank charges excluding the brokers commission.

The effective rate is the rate that includes all the fees and charges. It’s what the interest rate would be if you included all the fees and charges as interest.

Let’s run through a few examples.

Let’s assume a $20,000 at 5.00% base interest rate.

Brokerage usually gets calculated as a percentage of the loan amount being borrowed. It’s not the same as the interest rate.

So on a $20,000 deal if brokerage was:

1% that would be $200.
2% that would be $400
3% that would be $600

You get the idea

You can see how the effective rate is considerably higher than the base rate in all examples. I’ve seen brokers putting up to 10% on as commissions!

Car dealers are notorious for this. So many people are so chuffed by the fact the bargained the price down for the car, that they don’t realise the dealer made it all back on the finance.

Now you may think why on earth would a broker share this with anybody!?

A new Banking Code of Conduct has now been adopted by most financiers. Part of aftermath of the royal commission.

The interpretation of the new code is that you must show the customer an effective rate on the contract they sign.

So now, the cats out of the bag. Brokers can’t quote the base rates anymore. So might as well come clean.

Well…..you can sometimes get away with quoting the base rate.

The rule is, if a financier can’t take deposits, they don’t need to follow the new banking code.

Which is basically giving the non-bank lenders an unfair advantage. Won’t be for long though I imagine. I doubt the big 4 will let that slide.

Customers choose finance based on interest rate, not on how much actual money comes out of their account.

They will choose the lower interest rate even if it costs them more dollars. 🤦‍♂️

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