ASIC warns of 'extremely high' car loan fees amid rising complaints

Holly Reid stresses out when her car repayment gets closer.

Each fortnight, the single mum pays $339.

“I get a lot of anxiety, especially if I get an extra bill or rego’s up,” she says.

“It’s that uncertainty of whether or not I’m going to have enough food to feed the kids.”

Ms Reid took out a $22,000 loan in late 2024 with Rapid Loans, arranged through a broker.

While she has never missed a repayment, with the loan’s 22 per cent interest rate, it has meant making sacrifices.

She has fallen behind on other bills, but keeping her Honda CR-V remains a priority for her family.

Ms Reid believed the total loan amount was about $6,000 less based on conversations she had before signing up, and she did not realise she would be charged almost $5,000 in fees, despite it being in the contract.

“I actually only just found out when I was talking to the financial counsellor,” she says.

“It kind of made me a bit emotional.”

Ms Reid was working casually and pregnant with her fourth child when she took out the loan, something she said she declared to the broker.

However, she said she did not realise the pregnancy was not mentioned on her application.

She recently approached Rapid Loans for a hardship arrangement with the help of a financial counsellor.

Rapid told the ABC it was not made aware of her pregnancy and was considering her hardship application.

The company said Ms Reid and other customers were told about all fees, charges and interest before they signed up.

A rise in complaints about lenders

A new report by the corporate watchdog, the Australian Securities and Investments Commission (ASIC), is warning about the traps people can fall into when taking out a car loan.

The regulator wants customers to be wary of high interest rates and fees, high-pressure sales tactics and the severe harm of being stranded with a massive debt after having their car repossessed.

ASIC commissioner Alan Kirkland said the report was prompted by the rise in complaints about the sector.

“If lending practices aren’t appropriate, then people who are already struggling can be put in an even worse financial situation,” Mr Kirkland said.

The report examined two years of loan data from eight lenders.

Rapid Loans had the highest interest rate, with a 22 per cent median rate across all loans.

Latitude and Pepper were next with 14 per cent and 13 per cent, while Toyota Finance had the lowest median rates at 10 per cent.

ASIC said the interest rate reflected the risk posed by customers and the types of cars purchased.

Fees could also become a sizeable proportion of the loan.

Amongst the lenders, there was also an establishment fee of between $299 to $995 and a distributor establishment fee of up to $1,500, which is paid to a broker or a dealership for signing up the customer.

ASIC singled out Rapid Loans for being an “outlier” as the only lender to charge a “provider fee” on top of a loan establishment fee and the highest median loan establishment fees.

Rapid charged one Queensland customer $9,154 in fees, which included a provider fee of $7,339 for a $49,162 loan.

Ms Reid’s provider fee was $2,662.

Her financial counsellor, Alex Price-Busch from the Indigenous Consumer Assistance Network, has questioned why she was charged this fee.

“We couldn’t determine what that fee was actually for,” he said.

“I do think it could potentially be a fee for no service.”

Rapid Loans did not answer a question about the provider fee and what it was for.

ASIC labelled some of the fees as “extremely high” and warned lenders they must ensure borrowers could afford them.

“Now it may well be in some cases that lenders are able to charge them under the law, but if they’re adding to the cost of the loan, the lender needs to be making sure that the consumer can afford to repay that loan, and that the loan is appropriate.”

ASIC examined 267 loans where the vehicle was repossessed after the owner failed to keep up with repayments.

Some borrowers were left worse off, owing more than they had borrowed.

This could be because the car may have been over-valued when it was purchased, dropped in value due to poor maintenance or because of large fees added to the loan.

A woman from the Northern Territory was forced to hand back a Mazda dual cab ute after six months.

Her loan was $34,455, but after the ute was sold she owed $37,299 — 107 per cent of her loan.

‘People shouldn’t have to go through this much stress’

Alan Gray, a financial counsellor with Bush Money Mob, hoped the report would lead to enforcement action against finance companies if they were doing the wrong thing.

Mr Gray recently assisted an Aboriginal man in his 20s from Western Australia’s Kimberley region with a dispute involving Pepper Money.

While the man had a well-paid job, he said he was loaned almost $50,000 to buy a Toyota Landcruiser despite having few assets and little history of savings.

The vehicle broke down days after he picked it up, resulting in a large repair bill.

Unable to keep up with repayments, the man asked Pepper Money for a hardship arrangement and requested to move the repayment date to align with his monthly pay but claims both requests were denied.

The vehicle was seized and the man was sent a huge bill.

Mr Gray was forced to lodge a dispute with the financial ombudsman and eventually the matter settled.

“It was a good resolution in the end, but people shouldn’t have to go through this much stress just to be able to buy a reliable second-hand car.”

In a statement, Pepper Money said it had resolved the matter.

“We disagree that there was any breach of responsible lending obligations,” it said.

Pepper Money said it had made changes to hardship communications, distributor oversight and product governance as a result of the ASIC review.

It defended charging higher interest rates than some competitors and said that reflected the riskier profile of its customers.

The report found Rapid Loans had far more defaults where customers had missed repayments.

Over 64 per cent of their loans had one or more defaults, most in the first six months.

In contrast, Pepper was the next highest with 11 per cent of loans having one or more defaults.

Having a default usually meant the customer was charged an additional fee.

When people applied for hardship variations, Rapid rejected 53 per cent of them.

The lender also approved a large number of loans to people living near Yarrabah, in Far North Queensland, which has a high Indigenous population, and more people in casual work with relatively lower incomes.

More than 80 per cent of those loans had at least one default.

Mr Price-Busch is a First Nations man who works in the Yarrabah community and said the default rates reflected his case work.

He wants more action to crack down on poor conduct.

The report said Rapid Loans had appointed a hardship officer and made it easier for struggling customers to apply for hardship arrangements.

Rapid Loans declined to be interviewed and did not answer questions about the ASIC report.

In a statement, the executive chairman of Rapid Lending Group, Russell Birse, said the company “provides finance to everyday Australians who may not meet the lending criteria of traditional lenders, including customers in regional and rural communities”.

“We have and will continue to strengthen and enhance our lending processes. This includes strengthening broker oversight, hardship management, complaints handling, governance, and portfolio monitoring.”

He also encouraged customers who were struggling to use its hardship process.

High pressure sales tactics called out

The report also called out the sales practices of Toyota Finance and Australian Alliance Automotive Finance (AAAF) — both owned by Toyota Finance.

ASIC found these lenders were training car dealers to push a type of short-term loan known as Guaranteed Future Value (GFV) “on every single eligible car”‘ despite it coming with restrictions that might not suit some customers.

The report said Toyota Finance’s training for dealership staff used “high-pressure sales tactics”, and encouraged sales staff to overcome customers’ opposition to the GFV loans.

The lenders agreed to review their sales targets and dealer training.

Toyota Finance told the ABC it would review the report and consider making appropriate steps.