Is car leasing some kind of scam or fraud?

Short answer — no.

For the most part, new-car dealers are not scammers or fraudsters but, in their zeal to move cars, they often are guilty of some fairly unethical practices that leasing consumers should be aware of and keep a watch out for.

First, we should point out that leasing is a common financial practice that has been around since the birth of this country. Up until about the 1980s it was used primarily by businesses to finance vehicles, equipment, and buildings. During the 1980s, consumer leasing of automobiles began to appear and soon became popular. The concept was similar to business leasing, and most of the confusing language was retained, but it was very much like old “balloon” loans of the past.

Although leasing is completely legitimate, the way in which it is sometimes administered by car dealers can often be less than ethical. Dealers can take advantage of the fact that many automotive consumers don’t fully understand leasing.

Let’s take a look at some of the most common “tricks” that a car dealer might use when leasing to uninformed customers.

1. Boosting the price of a  leased vehicle

Most lease contracts show a “gross capitalized cost” that is the cost of the vehicle plus any other costs that will be financed with the lease. Frequently, these costs are not itemized anywhere in the contract. Therefore, it’s easy enough for the price of the vehicle to be set at full MSRP or higher, even though the customer thought he had negotiated a lower discounted price.

Customers are advised to pay close attention to the gross capitalized cost (cap cost) and if the amount is not itemized in the contract, ask the dealer salesperson to explain the amount in detail.

2. Adding unwanted cost

Because gross cap cost is often not itemized, additional costs can “creep” into the amount without being easily detected.  For example, there may be extended warranties, credit insurance, scheduled maintenance, or other costs that customers may not have knowingly authorized. Again, if the costs are not broken out and itemized, customers should query the dealer salesperson about it.

3. Forgotten down payment or trade-in credit

In a lease contract, there’s a line that specifies the amount of down payment (cap cost reduction) or trade-in vehicle credit, or possibly a rebate, that reduces the amount financed in the lease. Dealers can easily make a “mistake” here and “forget” to add one or all these credits to the contract. Customers should always make sure these reductions are accounted for and subtracted from gross cap cost to produce a lower net cap cost.

Cap cost reduction (down payment) should not be confused with “amount due at lease signing” which includes not only down payment but also first month’s payment, tax on down payments, and official fees.

4. Hidden finance charge

The finance charge in a lease is expressed as Money Factor, a very small number that can be converted to APR interest rate by multiplying by 2400.  However, it is never shown in a lease contract. In effect, customers are never told, unless they ask, what Money Factor they’re paying. A dealer can boost this number above the rate he’s given by his lease finance company without it ever showing in a contract. Although the total of all finance charges is required to be shown in contracts — it’s called a Lease/Rent Charge — from which the Money Factor can be calculated, most customers don’t know how to do it. Therefore, customers are advised to ask the dealers salesperson what Money Factor is being used to calculate payments.

5. Neglecting to mention restrictions and mileage limits

Although dealer salespeople could easily help customers determine if leasing is right for them, they often don’t — because it might result in the loss of a deal. They let customers make mistakes by neglecting to mention some of the restrictions and limits of leasing. Although these details are explained in lease contracts, customers typically don’t read them or know it’s there. Too often, leasers who drive too many miles for leasing end up learning about the limits too late to do anything about them. As a result, they end up having big excess-mileage fees at lease-end when they return their vehicles.

What to do?

Car leasing can be very successful and problem-free for those who take the time to understand leasing, know how it works, and know how to avoid problems. That’s what our Lease Guide is all about. Our Lease Kit can help by offering additional information and advice. It contains lease deal evaluation calculators, sample lease contracts and checklists, and other tools designed to help detect and avoid the kinds of problems listed in this article.