Toward a Better Understanding of Auto Leasing

Ford Motor Co. is taking the lead in what is likely to become an industrywide drive to simplify auto leasing contracts.

The move comes after years of criticism by consumer advocates and state attorneys general who have argued that disclosures in the contracts have been inadequate and misleading. The federal government is also considering regulatory changes.

Dearborn, Mich.-based Ford says it shaved the number of words in its leasing contract by 31%, added graphics and color symbols to highlight important information--such as how much you’re paying and what happens if you put too many miles on the odometer--and defined many of the more confusing terms.

“If you look at this from the consumer’s standpoint, it’s a bonanza,” says Nick Sharkey, a Ford spokesman. “But it’s also great for our salespeople because with these new contracts, they’re better able to understand what they’re selling.”

Although consumer advocates grouse that the changes ought to have come far sooner, many acknowledge that the new Ford contract, which is being used in all of the company’s leases as of Saturday, goes a long way toward providing consumers with the information they need.

“If people know what they are getting into, they have a much better chance of sizing up whether it is better for them to lease or buy,” says Gail Hillebrand, executive director of Consumers Union in San Francisco. “This is a tremendous improvement over the old contract.”

Still, Ford does not explain the interest rate charged, an important piece of information that should be included, Hillebrand says.

Other auto makers--including Chrysler Corp. and General Motors Corp.--are revising their lease contracts, but they are not expected to go as far as Ford in making the information easily understandable. In addition, the Federal Reserve Board is in the process of reviewing Regulation M, which governs what leasing companies must disclose. The regulatory reforms are expected to be modest, however.

The key improvement has to do with disclosing “capitalized cost”--that is, the leasing industry’s equivalent of the purchase price when all is said and done. That’s good, consumer advocates note. But the fact that not all makers have disclosed their cars’ full costs in the past is an indication of how many pitfalls there are to leasing, Hillebrand says.

Hillebrand also points out that the contract changes, welcome as they are, do nothing to reduce other important risks in leasing. Many consumers simply don’t realize how much a lease differs from a purchase. As a result, they find themselves paying too much for a car--or facing steep charges at the end of the lease that they had not anticipated.

One of a lease’s biggest draws is that monthly payments tend to be lower than those for a purchase. But consumers don’t build up equity with their monthly lease payments--they’re essentially renting the car for the term of the contract. At the end of the lease period--typically between 24 and 48 months--they either buy the car or turn it in.

Further, they must deal with restrictions in the lease contract. For example, the contract usually allows you to drive between 12,000 and 15,000 miles per year. You’re charged for any additional miles at a rate of, for example, 15 cents per mile. In other words, if your two-year lease allowed for 30,000 miles and you drove 35,000 miles, you would owe $750 in mileage charges at the end of the lease period.

Or, if you want to get out of the lease in less time than the contract states, you can expect to be on the hook for an early-termination fee that can amount to as much as the total remaining payments left under the lease contract.

Nevertheless, leases can be advantageous for people who like to drive late-model cars and who rarely drive great distances. And now that clearer contracts are likely to be the norm, consumers have a better chance of negotiating a reasonable deal, experts say.

“This is really a break,” says Art Spinella, vice president and general manager of CNW Marketing/Research of Bandon, Ore. “Ford has taken the remnants of a complex financial contract and turned it into something that everyone can use. To stay competitive, the other car companies are going to have to do this. And I think they will.”