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Brokers are increasingly having to disabuse clients of the notion that super-low interest rates on asset loans are achievable, as vehicle dealers increasingly lean on subvention finance to secure new vehicle purchases.
Subvention finance is often used by dealers to advertise below-market interest rates while subsidising the discount by increasing the profit margin built into the vehicle’s price.
As borrower demand softens and consumer and business sentiment remains subdued, brokers are reporting an uptick in car dealerships relying on super-low interest rates on car finance, typically under 2 per cent per annum (rather than the current average of 8 per cent, according to Canstar), to secure a deal. For example, MG is currently offering a 0 per cent comparison rate, while Nissan is advertising 1 per cent finance.
Subvention masquerading as ‘cheap’ debt
While appealing to consumers looking to limit their out-of-pocket expenses, the strategy fundamentally alters the mechanics of the transaction, with some brokers concerned that borrowers are under the misconception that they are securing themselves a bargain.
“Subvention finance is essentially a lever that vehicle or equipment dealers who have in-house financing from their parent company use,” Brendan Scotter, asset finance broker at Commercial Point Finance, told Broker Daily.
“It is straight up – smoke and mirrors.”
The trend has become a significant battleground for independent brokers, who are now finding themselves competing against low headline interest rates that mask the true cost of the asset – and having to spend additional time educating clients as to the true cost of subvented deals.
“The interest rate that the deal can offer, in most cases, cannot be lower than the cost of our major lenders,” Scotter said. “So how do they achieve it? Simple; the sales department (the dealer) pays the internal finance department a certain amount of money per item sold. These funds are used to artificially reduce the amount of interest charged on the finance which is taken out for the purchase of the equipment.”
To illustrate how this impacts the final invoice, Scotter pointed to the hidden premium added directly to the asset.
“The dealer might have a $100,000 item they want to sell. The finance department advises that they need to get a $5,000 contribution from the sales department to enable them to offer an interest rate of, say 3 per cent, for that transaction. The dealer then advertises the equipment for $105,000,” Scotter said.
“This is a very common tactic used by the dealer to entice purchasers to buy the vehicles or equipment, as the client feels they are saving money by paying less on interest over the term of their finance.
“But, in most circumstances, this is not true as they actually had to pay a higher price for the equipment than if they had negotiated a price for a cash purchase.”
With a new financial year having begun, car dealers are also utilising subvention finance to shift old stock from the floor plan, with some utilising aggressive sales tactics to leverage the consumer’s desire to save on interest charges. This can include threatening to withhold extended warranties if a client does not use in-house finance.
Furthermore, these deals often come attached to restrictive loan structures that do not match the buyer’s long-term objectives, acting as a hook to get the client through the door.
“Another great tactic dealers use is to offer the client an amazing subvented interest rate on the equipment, but the fine print states that it has to be with a term of three years with a 30 per cent deposit required and a 30 per cent residual, for example,” Scotter told Broker Daily.
“If the client wants to go with their usual five years with 0 per cent residual, the offer no longer stands. The client is in the dealership at the point of realising this, so the dealer has got what they wanted: the client in the dealership getting emotionally attached to the equipment.
“From this point, they have a much stronger chance of closing a deal, but it’s all just smoke and mirrors.”
How brokers are supporting borrowers
Indeed, many borrowers come to regret the financial decisions they make at car dealerships. Research from Money.com.au has previously shown that many Australians feel they have not received the right finance deal for their needs, with almost half (47 per cent) stating they regretted trusting the dealership salesperson to guide their loan choice, while 35 per cent said they did not compare other lenders before deciding.
Scotter said that brokers can provide substantial value by arming their clients with a strategic framework before they ever step onto a showroom floor to flush out the hidden dealer margins.
“After explaining subvention finance and how it works to my clients, I might advise them to negotiate the purchase of the asset with three different dealers for a cash-only purchase. Then, right at the end of the negotiation (when they have the best price that the dealer will offer), I suggest they advise the dealer that they have changed their mind and want to go with the finance offer. Almost every time, they will be unable to offer the amazing interest rate,” he said.
Scotter said that exposing the reality of subvention finance to clients can showcase how brokers are providing appropriate credit advice and serves as a powerful retention tool for those looking to solidify lifelong client relationships.
“I say the same thing to my clients once they can see what the dealer is trying to do: ’I am here with you for every finance transaction for the next 20 years. The dealer is here for this one-off deal. They don’t have your best interest in mind, I do,’” Scotter said.
“If I show the client what is happening and they see it for themselves, it becomes the moment where that client gains even more trust in me and they never look to any other brokers or dealers going forward. Works every time.”
Car finance in ASIC’s sights
The sales tactics and opaque pricing structures utilised in car finance have caught the eye of the Australian Securities and Investments Commission (ASIC).
As reported by The Adviser, the corporate regulator recently delivered a blistering critique of the car finance market, reviewing more than 350,000 loans to flag risky distributor conduct, steep fee structures, and wide interest rate spreads (ranging from 10–22 per cent).
ASIC said that one customer had borrowed $49,162 and paid more than $9,000 in upfront fees, roughly 18 per cent of the total loan amount.
The review also exposed severe deficiencies in consumer protection, revealing that 90 per cent of borrowers whose cars were repossessed and sold were left with substantial residual debts, still owing more than half of their total loan amount.
In response, the regulator has demanded an immediate clampdown on high-pressure sales behaviours, calling for clearer target market determinations and tighter oversight frameworks for broker and dealer networks.
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