Hidden costs: how finance firms make money

Almost every "hidden cost" in consumer finance is one of four things wearing a different outfit. Learn the four, and the specific examples below stop being surprises — you'll recognise the shape.

The first is commission: a salesperson or broker is paid by the product provider, not by you — and sometimes paid more for putting you in a worse deal. The second is the mark-up or spread: the price you're shown already has a margin baked in over what the provider itself paid, like the gap between a wholesale exchange rate and the one you actually get. The third is fees — establishment, monthly, default, exit — each one small-sounding, the pile of them not. And the fourth is the cross-sold add-on: an extra product slipped in at the moment of sale, when your attention is on the car or the house and the seller has all the leverage.

Hold those four in mind. Everything below is an example of one or more of them.

A car is where the mechanisms come together, because a single afternoon can carry three separate ways to charge you — the finance, an insurance add-on, and a warranty — all framed as "getting you sorted."

The finance. When a dealer arranges your loan, they're not a neutral broker hunting your best rate. For years, dealers could set the interest rate within a band and earn a bigger commission the higher the rate they signed you to — a practice called a flex commission, where the dealer's cut could be up to 80% of the interest charges. Most buyers were told none of this. ASIC banned flex commissions from 1 November 2018, so the rate should now reflect your finances rather than your willingness to haggle — but the deeper lesson holds: the yard is not the cheapest place to arrange a loan.

The add-on insurance. Next comes the optional cover — "gap" insurance, consumer-credit insurance, tyre-and-rim, and so on. ASIC's reviews found this stuff was, on the whole, dreadful value: for every $1 paid in premiums in car yards, buyers got back about 9 cents in claims. Insurers eventually agreed to repay more than $290 million to people who'd been mis-sold it, including some sold cover they could never have claimed on. Since 5 October 2021 a deferred sales model applies — a built-in pause, so the add-on can't be sold to you in the same breath as the car.

The extended warranty. Finally, the warranty upsell — which often duplicates rights you already have for free. More on that just below.

Here's one of the most useful things to know before you buy any extended warranty or "care package": under the Australian Consumer Law, the goods you buy come with automatic consumer guarantees that a business cannot take away. They must be of acceptable quality, fit for purpose, and match their description — and if they're not, you're entitled to a repair, replacement or refund.

The key part: these guarantees are separate from, and can outlast, any manufacturer's or paid extended warranty. You can ask for a remedy after a warranty period ends. If an $1,800 television dies after two years, a reasonable person would expect more than two years from it — so you may have a right to a remedy whether or not you ever bought the extended cover. Businesses aren't allowed to pressure or mislead you into an extended warranty, or imply you need one to keep these basic rights.

One boundary worth knowing: consumer guarantees cover goods and services, not financial products like insurance — those sit under a different regulator (ASIC). So the add-on insurance from the car example plays by different rules than the extended warranty does.

A good mortgage broker can genuinely save you time and money — and they're usually free to you, because the lender pays them. That's also the catch worth understanding: they receive an up-front commission when your loan settles, a smaller trail commission each year it stays open, and sometimes other perks. There's also a clawback — if you refinance or pay the loan out early (often within about two years), the lender takes the up-front commission back from the broker, which can quietly discourage them from suggesting you switch.

The protection: since 1 January 2021, brokers have a legal best interests duty — they must put your interests ahead of their own, and disclose how they're paid. So the single best question you can ask is simply, "How are you paid, and does any lender pay you more than the others?" A good broker answers it without flinching.

Buy Now, Pay Later feels free — and if you pay on time, the interest genuinely is. So where's the money? Two places. Merchant fees: the shop pays the provider a slice of every sale (commonly around 4–6%, more than a card costs) — a cost that tends to lift prices for everyone, cash buyers included. And late fees: ASIC found these came to over $43 million in a single year, with about one in five users missing a payment.

The good news is that the rules caught up. From 10 June 2025, BNPL is regulated as credit, so providers must be licensed, check that repayments are affordable, consider hardship, and — crucially — be members of AFCA, the free complaints service. So a BNPL dispute now has somewhere to go.

Rent-to-own and consumer leases turn a fridge or a laptop into small weekly payments — which feels manageable and quietly isn't. You pay well above the cash price, there's usually no cooling-off period, and at the end you often don't own the item. ASIC once found these leases could cost as much as 884% of the item's price; in one case, customers typically paid almost four times retail for essentials, and the operator was penalised $7.4 million.

Things are better than they were. Since 12 June 2023 there's a legal cost cap — the most you can be charged is the item's base price plus 4% of that price for each month, counted up to 48 months — and your repayments can't exceed 10% of your after-tax income. Even capped, a long lease can total close to three times the cash price, so it's worth using Moneysmart's free rent-vs-buy calculator and checking cheaper options first (lay-by, No Interest Loans, a Centrelink advance).

A payday loan — up to $2,000, repaid over 16 days to a year — charges no interest, which sounds reassuring until you read the fees. They're capped, but steep: an establishment fee of up to 20% of what you borrow, plus 4% a month. Moneysmart's own example: a $2,000 loan over a year costs about $3,360 to repay — roughly $1,360 on top of what you borrowed. Miss payments and default fees can stack up to a cap of 200% of the amount borrowed.

There are protections — your repayments can't exceed 10% of your after-tax income, and lenders must check you can afford it — and cheaper paths exist: No Interest Loans for eligible people, a Centrelink advance, or talking to whoever you owe before borrowing to pay them. If money is tight, the National Debt Helpline (1800 007 007) is free and confidential.

Not every story here is a warning — some is progress. Financial advisers used to be paid commissions by the companies whose products they recommended, which is exactly the conflict you'd worry about: advice shaped by who paid the adviser most. Reforms known as FOFA changed that. Since 1 July 2013, conflicted remuneration — commissions and volume-based payments — has been banned for personal advice on most investment products, and advisers carry a legal best interests duty.

It's not absolute everywhere (life-insurance commissions are handled separately — see below — and some general advice is carved out), so it's still fair to ask how an adviser is paid and to check they're licensed. But for personal investment advice, the law now sits on your side of the table.

It's easy to come away from all this feeling outgunned. You're not — there's a real safety net under consumer finance in Australia, and most of it is free. ASIC is the regulator; it licenses lenders, brokers and advisers, runs the Moneysmart site and its free calculators, and you can check any provider is licensed before you sign. The Australian Consumer Law, enforced by the ACCC and state fair-trading offices, is where your automatic guarantees on goods and services live. Responsible lending rules mean a licensed lender has to check a loan is affordable before approving it. And if you're struggling to repay, you have a right to ask your credit provider for hardship help — they're required to consider it.

The backstop that ties it together is AFCA, the Australian Financial Complaints Authority. It's free, independent, and an alternative to court. The path is simple: complain to the firm first, and if that doesn't resolve it, take it to AFCA. Its decisions are binding on the firm but not on you — you keep the right to go further. There are time limits (generally within two years of the firm's final answer), so don't sit on a problem.