Legal Loan Sharks
One of the most expensive misconceptions people have is that leases have no interest included as part of their payments. When deciding between buying or leasing anything, it's important to know the cost in terms of the inherent interest rate. Whether it's for a new vehicle, or a new machine for one's business, the lease versus buy decision is common for everyone.

This is much more difficult for leases because the leasing companies have paid off politicians to remain exempt from the APR (annual percentage rate) disclosures that are required for normal loans.

With leases, there is no mention of APR. When you ask the salesperson what the interest rate is for a lease, they will tell you zero. This is due to a combination of sales people too stupid to know about the interest built into leases and sales people who know, but bank on the ignorance of their customers.

The motivation for this little rant was an ad that came in Saturday's snail-mail for a chain of rent to own places, with several locations around Arkansas. Just glancing at the numbers made it obvious that these people are the very definition of loan sharks. For example, the very first item is a big screen TV. It has a cash price of $1,754.42 and a rent to own price of $29.99 per week for 117 weeks. The ad does show the total of the payments ($3,508.83), but absolutely nothing about interest.

Using my handy TaxTools program, which allows me to calculate the interest rate in a loan, it came up with a nominal rate of 70.517% and an effective rate of 101.425%. If consumers knew this, they could easily realize that using a credit card, with interest rates of 20% to 30%, would save them a ton of interest.

Nowhere in the four page circular is there any mention of an APR. I did a Google search of their website, and there is no mention of APR there either.

It's not nearly as bad in terms of the rate with car leases; but it is still hidden. However, I have done this kind of calculation for clients who thought they had gotten a great deal and came up with interest rates as high as 35%. Again, nowhere in vehicle leases can you find this disclosed. It's a loophole in financial disclosure rules big enough to drive an SUV through.

I recently wrote to the Arkansas Attorney General's office asking for their comments on this matter. In my message, I also asked if his office has any plans to crack down on this practice of quasi-legal loan sharking, which we all know hurts lower income people the hardest. Whether or not they can legally charge over 70% interest isn't as important as the way they disguise it. Forcing them to disclose the interest rate would go a long way towards enabling consumers to make more educated decisions on their purchases. I will post any response I receive.

More important than the classic "Buyer Beware" warning is "Renter (lessee) Beware."
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/31/2003 12:38:00 PM Send this post: