Business Use Loans – No Early Exit Fees?
When you are taking a car loan predominantly for business purposes, the terms and conditions of any lender is not as detailed as if you were taking out a personal use loan.
The reason for this is that business use loans fall outside the scope of the National Consumer Credit Protection (“NCCP”) Act, therefore the same levels of disclosure are not a requirement and most lenders will give the bare minimum information.
Due to this, a lot of brokers, introducers, or lending institution staff, will outline that their Commercial loan products have no early exit fee if you were to pay the loan out early and won’t elaborate on this further.
This is true in some sense, but I feel that important information surrounding this is never explained and giving the customer not complete accurate information, although you are not really being lied to, but important information is being withheld as the customer is not asking the right question.
The correct question on a business use loan should state “Will I save on all outstanding interest when I pay my loan out early and will there be any early exit fees?” This question would then have to be answered differently, as the staff member then could be lying to you.
Some finance products, usually Lease Agreements, would not rebate any interest at all if you paid the loan out early, which would mean that you would pay the same amount over the full term of the loan as the same amount if you were to payout the loan early, meaning not much benefit to terminate your contract early.
Most lenders on Commercial products will calculate your ‘interest rebate’ on a method called a Rule of 78. Pretty much most commercial loans and lenders that provide these loans will not rebate 100% of the outstanding interest and this amount can be substantially more than then the small early exit fees on a consumer loans. So whilst you are being told that there are no early exit fees, to payout your business use loan early is actually costing you more than a consumer loan if it were to be paid out early, as all relevant information is not being disclosed as the right question is not being asked.
As the loan falls outside the scope of the NCCP Act, it is not required to advise you of how the interest is calculated throughout the loan term and if you were to terminate your contract early, how much interest you would save. This is a good reason why some commercial loan products offer cheaper interest rates and no monthly account keeping fees, as the lender is protected in some sense if you were to pay the loan out early by withholding some of the interest rebate that you would have received if it were a consumer use loan.
Next time you are getting a Commercial loan from your normal provider, ask the question about the interest rebate and you may be surprised to learn that you are actually being penalised in some way and in fact although there is no early exit fee, they are not rebating all outstanding interest left owing at the time of payout.
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