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A consumer lease is a form of finance provided by retail outlets. They tend to be offered by stores selling more expensive consumer goods like furniture, TVs and computers, and whitegoods. This type of finance allows you to lease the items over time rather than buying them outright.
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- What are consumer leases?
- What makes them attractive?
- What are the potential traps?
- What to look for in a lease contract
- Some alternatives to consumer leases
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Leases last for a fixed period (usually two years or more), during which you make regular payments to the retailer. At the end of the period, you usually have a number of options:
- Buy the item outright at its market value or an agreed value
- Buy a similar model to the item you've been leasing, for a nominal fee
- Upgrade to a new lease contract featuring a newer model.
In some circumstances, a consumer lease might be attractive to some consumers. A consumer lease allows you to take the item home straight away without having to pay the full price up front. And, when the time comes to buy the item outright, you have the option of taking out a new lease on a newer model instead.
But the catches can be numerous, and depending on the circumstances and how the lease is managed, they may far outweigh any potential benefits.
If you're thinking about taking out a consumer lease, proceed with caution. When it comes to dealing with any financial product, the golden rule is always to read the fine print. This is definitely the case with consumer leases, because the devil is often in the detail, and that detail can be very hard to come by. In particular, look out for these potential pitfalls:
Many consumers falsely believe that once they start making repayments, or at least when the repayment period ends, technically, they own the product. But this is not the case with a lease. Even once the repayment period is over, you are still required to then buy the item for an agreed price. Then, and only then, do you own the product that you've been leasing all this time. In some cases for example, you may only be entitled to 'buy' the product after two successive leases have been taken out.
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A lease locks you in for a set period of time, regardless of whether you change your mind in the meantime. If you are allowed to break the contract early, you may still be required to pay out the full lease anyway, and you'll often be required to pay hefty exit fees for leaving early. And, there's generally no 'cooling off' period with leases – which means that once you sign, you're locked in.
The overall cost of leasing is usually higher than if you'd just paid for the item upfront, or if you'd used an alternative finance product (see below for alternatives to leasing). According to the Australian Consumer Association's Choice magazine on-line (Choice)*, some lease payments can accumulate to 50-100% above the original cash price.
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- Think about whether you really need the item right now, or whether you could wait until you've saved enough money to buy it outright (paying for something upfront is usually a much cheaper way to buy in the long run, even if the product is marked at a special 'reduced price' for those who choose to lease).
- Never sign any contract if you're being pressured, and never sign on the spot. Always take a contract away and read it carefully. If the company is reputable, they will let you take the contract away to look over it more carefully. If they don't – forget it.
- If you're not sure of something – ask questions until you have the answers you need, and preferably get those answers in writing.
- Get a second opinion from an independent party (such as a financial counsellor, Consumer Affairs, or the Office of Fair Trading in your State or Territory).
- Shop around. Work out the full cost of the lease over the life of the contract, and work out whether you can get a better deal by using another method of finance.
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Choice* also warns that some of the lease products offered by some big-name companies may not advertise what the true cost of the lease is – i.e. what the total lease payments plus any ongoing fees will add up to over time. Instead, they only indicate what the regular repayment amount will be. In addition, they may not indicate what the item's cash price is – which means you can't compare what you'll pay if you buy the item upfront versus what you'll pay overall if you take out the lease. So it's important to bear in mind that going with a well-known store won't necessarily offer you any protection from poorly explained financial products that may disadvantage you in the long run.
Some lease contracts require that you pay an ongoing amount to insure the item – even though you don't technically own the item. And, if the item is defective or stolen, you may still have to pay out the full requirements of the lease.
Under the terms of many lease contracts, if you miss a lease repayment, the item you are paying for may be taken away, but you'll still be left with the lease, and possibly additional penalties for having missed a payment. You may even be asked to pay out the entire contract immediately.
* Australian Consumer Association, Choice magazine on-line, "Buying guide: store finance deals", www.choice.com.au.
If you're thinking about taking out a lease, you need to read and understand all the information you're given so that you know what you're really signing up for. Look for the following information in your lease contract, and if it's not there, make sure you get the information from the retailer in writing - don't just rely on what they tell you face to face; not only is it easy to forget the details once you've left the store, it's also easy for a salesperson to overlook certain details.
- Interest rate - these are not always clearly disclosed, but it's vital that you know what the interest rate is, otherwise you can't compare the lease with other finance products (such as a personal loan), which means you won't really know if you're getting a good deal
- The term of the lease (i.e – how long are you locked in?)
- What your regular repayment amount will be
- How many repayments you'll need to make over the life of the lease
- What ongoing fees and charges apply to the lease (e.g. are there account keeping fees?)
- What the total cost of those repayments (and any ongoing charges) will be for the life of the lease
- What conditions apply once the lease term expires – e.g. how much will you have to pay to then buy the item? Will it be based on market value, or a value agreed with the retailer, and who determines this price?
- What penalties apply if you want to break the lease early or simply repay the lease early
- What penalties apply if you miss a repayment
- What are your rights if the item you're purchasing is damaged, defective or stolen? Will you still have to pay for the lease under these circumstances?
Before you take out the lease, think about whether you're really getting a good deal.
- How much would the item cost you if you were to buy it up front?
- How much will you pay for the item in total if you take out the lease?
- How much would the item cost you if you used a different finance method to make your purchase? (see below for more on alternatives to consumer leases)
You may find that there are other, more cost-effective ways to purchase the item.
If you're not sure whether it's a good deal for you, before you sign up, it might be worth taking a copy of the lease contract to a financial counsellor for a second opinion. And if you're feeling uneasy – trust your instincts – never sign something that you don't feel sure about. You could also run your own 'safety check' by contacting Consumer Affairs and the Office of Fair Trading in your State or Territory to inquire about the retailer offering the lease, and whether they've had any negative dealings with that retailer.
Usually, it may be cheaper in the long run to simply buy an item up front, rather than taking out any kind of finance. If you don't have the money right now, could you set aside a regular amount of money to save up for the item and eventually buy it outright? Or, could you put the item on lay-by, and make the required instalments until you can take it home?
Of course, saving up the cash may not be an option if it's an essential item that's desperately needed – for example if your fridge or washing machine breaks down. If you just don't have the cash, then you may need to use some form of finance to purchase the product.
When it comes to choosing which type of finance you'll use, you should shop around to investigate the alternatives to see which form will offer you the most cost-effective deal and best suit your circumstances and capacity to repay. Here are some alternatives to consumer leases that might be worth considering. Of course, every form of finance has its own pros and cons. You'll need to weigh up the alternatives and determine which ones work best for you.
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| A credit card is a form of finance that allows you to buy now and pay later. Ownership of the item would transfer to you once you make the purchase, but you are then responsible for paying the debt off your credit card. |
If used wisely, credit cards may help you to access some 'big ticket' items that you can't necessarily purchase up front. But bear in mind that interest can apply to your purchase, as can other costs associated with credit cards, such as annual card fees etc. |
| Store cards are essentially credit cards offered by a specific retailer. They work the same way as credit cards in that you can effectively buy now but pay later. Ownership is transferred to you when you buy...and so is the responsibility of paying off your debt. |
The interest rate charged on store cards is often higher than credit cards offered by financial institutions. |
| Personal loans can be used to make one-off purchases that are too expensive to pay for up front, and therefore require a longer repayment period. They are offered by most mainstream financial institutions. |
Interest rates on personal loans are generally lower than other forms of credit such as credit cards, but many can't be used for everyday purchases, so you'd need to talk to your financial institution about the purpose of the loan to see whether you would qualify. Interest applies, and you may be able to choose between a fixed or variable repayment option. You'd need to discuss any other fees applicable with the financial institution. |
| A wide range of lenders, including community organisations, government-lenders and some mainstream financial institutions, are now providing credit options for people earning lower incomes, or those living on government pensions. Some offer low rates of interest, while others charge no interest at all. They are specifically designed for those who are on low incomes and who have difficulty obtaining credit through mainstream providers. |
Like their names suggest, these loans allow users to benefit from low or no interest. They can only be used to purchase various essential items (for example washing machines, furniture, vocational education expenses, computers etc). A set amount can be borrowed, and is usually repayable over a time frame of around 12 to 15 months. |
| Many retailers offer interest-free deals, often advertised as 12 months or 24 months interest free. To obtain these deals, you usually need to purchase these goods using credit arranged by the store (so you're effectively taking out a loan or a credit card through the store). |
Interest-free deals may work out to be more cost-effective in the long run providing you pay off the amount you owe before the interest-free period expires. But it's critical to read the fine print. In some cases, a substantially higher rate of interest kicks in as soon as that 'honeymoon period' is over (so you might end up paying more interest overall than if you'd used an alternative credit arrangement that charged a lower rate of interest from the very start). |
Refer to our fact sheets: Credit – some every day options, and Credit cards – are they costing you?, to find out more about these forms of finance.
To find out more about consumer leases:
- ave a look at the Australian Consumer Association's website at www.choice.com.au, in particular the article titled "Buying guide: store finance deals."
If you want to find out more about some alternative forms of financing that might offer you a better deal than a consumer lease, refer to:
To find out more about loans for lower income earners, an internet search will bring up a number of loan providers in your area who cater for lower income earners. Alternatively:
- contact your local council for details of free financial counselling services in your area. A financial counsellor will be able to outline any low-interest loan or No Interest Loan Schemes (NILS) options available to you;
- contact Centrelink's Financial Information Service on to inquire about low-interest loans and NILS;
- contact the major financial institutions in your area and ask about the loans they have available for lower income earners.
Visit the Australian Competition and Consumer Commission's website at www.accc.gov.au to find out more about your rights as a consumer, and to find out how to contact the Office of Fair Trading in your State or Territory.
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