04.Loop holes and options
Leasing loop holes
Instead of an expensive consumer lease, you’d usually be better off buying goods on interest-free finance or even using a credit card (depending on the interest rate). But it’s little wonder some finance companies push their leasing arrangements:
- They charge much more than the value of the item.
- Some lock you into contracts with expensive exit fees.
- They don’t have to disclose the cash price in brochures.
- There’s no interest rate to be disclosed either.
CHOICE wants to see leasing companies (and retailers) forced to prominantly display the following, so you’d be in a better position to compare finance deals:
- How total lease payments add up compared with each product’s retail price.
- All charges and early repayment fees.
- Effective annual interest rates.
The situation is made easier for leasing companies because lease contracts don’t have to comply with certain laws that apply to loans. Under the Uniform Consumer Credit Code, an agreement that gives consumers the right to buy goods at the end of a payment term isn’t in fact a lease. It’s technically a loan or a sale of goods by instalment. So leasing contracts are designed so that consumers can offer to buy the goods later (allowing leasing companies to compete with in-store interest-free finance), while at the same time being structured in ways that avoid the stricter regulation of loans. For example, we see:
- lease contracts allowing consumers to make an offer to buy the goods, but not giving the right to buy them (technically, that’d make it a sale by instalment).
- leases giving consumers the right to buy similar goods (but not what they actually leased) at a fixed price at the end of the term (sometimes a nominal amount, like $1).
- leases that say you can ‘keep the goods forever’ while, technically, the lease company retains ownership (this also ensures that legally the arrangement remains a lease, while in practice some of its features are similar to a sale by instalment).
The bottom line for cost-conscious consumers is that in most cases, if you want to own the item, avoid leasing.
What the options cost
The table compares what you could pay for a $2500 purchase with various finance options, rounded to the nearest dollar.
|$2500 Purchase options
||Cost of credit ($)*|
|OPTION A: Pay cash
||Cash price: $2500
|OPTION B: 2-year 12% pa bank loan
||Total payments made: $2924
|OPTION C: 2-year consumer lease (’rental’ deal)
||Total payments made: $3312
|OPTION D: ‘Buy now, pay later’ interest-free finance over 18 months
||Repaid within 18 months
|80% repaid within 18 months and balance repaid 1 year later
|60% repaid within 18 months and balance repaid 1 year later
|OPTION E: Interest-free instalments over two years
||Repaid within two years
|Only pay minimum amount for months 19–24 then return to original repayments
|OPTION F: Credit card
||10% pa card, repaying $115 per month for two years
|16% pa card, repaying $122 per month for two years
* Cost of credit includes fees, any interest paid, and/or lease payments.
(A) in this case, 'credit' means the cost above the retail price; it's 32% higher.
Option B: Two-year 12% pa bank loan
- This assumes a $100 application fee and 12% pa interest rate.
- The fixed repayments required to clear the loan are almost $118 per month for two years.
Option C: Two-year consumer lease (‘rental’) deal
- Based on a two-year consumer lease, the monthly payment required is $138 (quote from a leasing company website).
Option D: 18-month ‘Buy now, pay later’ interest-free finance
An 18-month interest-free term is generally the longest available. Our example assumes GE Money’s $25 establishment fee, $2.95 monthly fee and 27.99% pa interest rate.
- The first calculation shows the cost if you repay in full within 18 months.
- The second and third calculations show what happens if it takes you 12 months longer. In these scenarios, you make only the minimum monthly payment (the greater of $30 or 4%) during the following 12 months, and then repay whatever is left to clear the loan. Failure to pay the minimum incurs monthly late payment fees.
Option E: Interest-free instalments over two years
This example assumes GE Money’s $25 establishment fee, $2.95 monthly fee and 27.99% pa interest rate.
- The first scenario shows what happens if you pay in full within two years.
- The second scenario calculates what happens if you can only make a minimum monthly repayment (the greater of $40 or 3% — in this case $40) for months 19–24, then returning to your original repayments until the loan is cleared in full. (The minimum monthly payment is less than the monthly instalment to fully clear the debt, which in this scenario would be $108.) Failure to pay the minimum monthly amount may incur late payment fees.
Option F: Credit card
- We show approximate interest charges when you make the regular repayment amounts needed to clear the loan in two years at rates of 10% and 16%.
- Paying less (or late) can incur late payment fees. We assumed interest is backdated to the date of purchase on the full amount (the most common and ‘mean’ way card companies use).
Looking for credit?
1. Personal loan. Shop around for the best deal. Consider the annual nominal interest rate and application and account fees. You should find out what other fees and conditions apply for the loan you’re interested in, and ask the bank for an exact quote for your repayments.
2. Deferred payment deal. With these kind of deals you can defer paying for an item for up to 18 months. There’s no interest during that time (although account fees may apply), but after that interest is charged on whatever is still owed.
3. Interest-free credit by instalments. With these kind of deals you repay the cost of the item in equal monthly instalments. Late payments can lead to interest charges and fees.
4. Consumer lease agreements. You rent the item but don’t get ownership.
5. Paying up-front. Paying up-front means there’s no cost of credit and you’ll own the item straight away. However, there’s an ‘opportunity cost’; by paying up-front you’ve lost the opportunity to invest that money somewhere else.