Broker versus banker……. who should you choose?

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Choosing who will assist you with your finance is your first step. There are many options out in the market, and it is important to understand how each operates. Brokers and Lenders must co-exist, they are reliant on each other to operate in a healthy, competitive market. And consequently, it provides the consumer with more choice.

Lenders have a number of channels to their business models – direct (branches and online), finance brokers and mobile bankers. Having multiple channels encourages healthy competition, which benefits the consumer as it creates better outcomes in service and price, Not all Lenders have these channels however, many smaller lenders rely 100% on the broker channel to support them. So Brokers have allowed these lenders to operate in the market, which in turn creates more competition and (again) better pricing for borrowers.

So, let’s have a look at the main 3 main channels for the consumer to consider: when it comes to financing an asset purchase:

  1. Finance Broker – licensed finance brokers are regulated by ASIC and hold Australian Credit Licenses. They are regulated by the NCCP Act (2009).

  2. Dealer Finance – business managers operating in car dealerships as employees or contractors who are (generally) unlicensed operators. They have point of sale exemptions under the NCCP Act (2009). We discuss this more in our dealer vs broker blog.

  3. Bank or Lender – direct through the branch, online or rmobile banker.

In this blog we are going to focus on the pros and cons of using a Finance Broker and a Banker/Lender.

Choice

Finance Brokers have access to several Lenders through an Aggregator (think AFG, NFC or Choice). For example, the yespproved.com.au panel consists of 24 lenders. They range from mainstream banks to smaller lenders. Each Lender tends to specialise in a particular suite of products and consumer profiles. A Broker’s job is to match a Lender’s Product with a borrowers Requirements and Objectives and find them the best deal.

Conversely, a Lender has only one suite of products and policy available. This can have its limitations, especially when it comes to policy. You may have experienced times when a lender has declined your application, yet another has approved it. This is a result of varied risk appetites and policy between lenders. For example, some of the mainstream lenders will not finance any vehicles over 7 years old. Yet smaller lenders will and offer very attractive interest rates.

When searching for finance it is important to shop around. You would be surprised at how diverse a Lenders offering can be, and a good Broker will do this for you.

Best interest

Brokers and Lenders should always have a borrower’s best interests at the forefront of what they do. The interests of the borrower are integral to a Brokers and Lenders reputation, and I believe (post Hayne Royal Commission) that both have upped their game when it comes to prioritising a customers interests over their own, so lets hope this continues. These are the minority of course; the majority of Brokers and Lenders already exercised this approach. Finance Brokers are always required to put your best interests above their own, and this was formalised with the introduction of the Best Interest Duty in 2019. Many are small-medium business operators and are very reliant on strong client relationships and referrals.

Product Comparisons

There can be significant pricing differences between lenders. depending on the borrowers needs and requirements. For example, let’s say you are purchasing a 10-year-old car. Many Lenders consider these higher risk, yet others have a very strong appetite for this type of asset, and this will be reflected in their pricing. There is not a one size fits all, so it is important to shop around or use a Broker when it comes to comparing products. A Broker will get to understand your needs and find the Lender offering the best product to meet your requirements. Do not rely solely on one Lenders product offering.

Impartiality

Are Lenders impartial? By design, they really can’t be as they are offering one suite of products. However, from my experience many of their Personal Bankers will direct their customers to a finance broker, if they are unable to assist with the application.

Lenders from the top down have, in recent times become consumer centric and are willing to assist the customer regardless of any benefit to them. Call it good karma or good business, either way I give them credit for that.

A Finance Broker should be impartial and have sufficient lenders to provide options and solutions for their customer’s. If they do not have more than 5 lenders on their panel, then it could be questioned whether they have impartiality. Often, it can be easy for a Broker to favour a handful of Lenders which is contrary to a customers best interest. There could be practical reasons for this, such as having a very narrow client profile who suit a small number of lenders. A minimum of 3 product options should be provided (on a Credit Proposal) from a panel of at least 10 lenders, to feel comfortable your Broker is impartial.

Relationship

Finance Brokers and Lenders should strive to form strong relationships with their customer’s. These are strengthened through what I have already discussed – practicing best interest, impartiality and providing choice. But are they equally as strong? I believe this comes down to the individual.

Very often, a Broker or Lender who is recommended by a friend or work colleague is the best advocacy and gauge of their competency. Google Reviews are also providing a great snapshot of customers experiences.
Interestingly, Mortgage Brokers now represent over 60% of all residential loans introduced. This speaks volumes of the value that borrowers see in using the services of a broker.

Diversification

Lenders through their sheer size and scale are able to provide a diverse range of services – asset finance, business loans, home lending, general banking and insurance. This can be very convenient when it comes to centralising a customers lending and banking. But here is the conundrum. They do this to lock in their client’s loyalty. Think about this – if you have a home loan, car loan, savings account and credit card with one lender, what is the likelihood you will move from that lender? If i had to hazard a guess, it would be very low.

Diversity in the range of services available is important but it’s equally important to balance this with lender diversity. A finance broker will provide this through their panel of lenders. Diversifying loans over a variety of lenders provides a ‘foot in all camps’. It keeps each lender on their toes, continually vying for the business.
Finance Brokers have diversified their business models in the last 5 years, expanding their service offering or aligning themselves to Broker’s who have expertise in other areas of finance.

Lenders also have aggregate limits on how much they will lend a borrower. So diversifying helps spread that risk among many lenders. This is especially so for business customers purchasing assets for their business.

Remuneration

Finance Brokers will often charge a Broker Origination Fee, when preparing a car loan or alike. This fee is disclosed in the Credit Guide and Credit Quote which is signed and acknowledged by the borrower prior to applying for the loan. This fee is generally added to the loan and helps cover the cost of the Brokers service. Unlike Lenders, finance brokers are required to provide and prepare compliance documentation to meet the requirements of the NCCP Act (2009). This information takes time to prepare, and is a due diligence performed by the broker to ensure the loan meets your needs.

The team at yesapproved.com.au are always available to guide you through the finance process. We provide impartiality, choice and always have your best interests at the forefront of our service to you.

The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.

Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs.

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