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Top 10 leasing booby traps

Example: Let's say you have your eyes on a small SUV with a sticker price of $25,000. You negotiate the selling price down to $22,000 and the dealer says the residual value is $12,000. That means your 36 monthly payments -- not counting taxes, interest and fees -- would be $277.77. But you try to get the price down by telling the salesman you can only afford $250 per month. He goes and talks to his manager and comes back a half-hour later with the good news -- $250 it is. But the term of the lease has gone from 36 months to 40 months -- which he may or may not point out at the time. All that's happened is the term has been extended -- you haven't saved one red cent.

10. Interest-rate razzle-dazzle

There is no such thing as an annual percentage rate on a lease. It doesn't matter what you see in an ad. The APR (annual percentage rate) listed either is illegal, inaccurate or not an APR.The razzle-dazzle comes in when the salesman or dealer tries to confuse you about APR and what's called a "money factor."

The money factor is similar to an interest rate and determines how much you'll pay in finance charges over the life of a lease. The higher the money factor, the more you'll pay in finance charges. It's expressed as a decimal such as .00260. To convert to an equivalent interest rate (APR), simply multiply by 2400.

What is the "money factor"?
The money factor is a number that calculates the interest expense associated with the lease. Multiply the money factor by 24 or 2400, depending on if it is expressed as a decimal or a percent, to convert the money factor into an approximate annual percentage rate (APR).

Example: An unscrupulous salesman might boast about an interest rate with an APR of 2.6 percent. Then he applies the money factor of .00260 to his calculations and you think you're paying 2.6 percent interest or APR. But if you do the math you'll see that .00260 multiplied by 2400 equals 6.24 percent. That's the equivalent APR, not 2.6 percent.

You might want to work this backward. If a dealer, for example, tells you they can equal the rate you've been offered by a bank or credit union, simply take the rate the lending institution offered and divide it by 2400. Say you were offered a rate of 6 percent by your credit union. Divide it by 2400 and you'll get the money factor of .0025. Then ask the dealer for the money factor and if it's higher than .0025 you know the interest rate is higher than 6 percent.

When visiting a car dealer for the purpose of leasing, ask them about the money factor on their leases. It is not something that is routinely disclosed. In fact, it is not even disclosed in most car lease contracts. If you don't ask, you'll never know. If a dealer refuses to disclose this important information to you, find another dealer.

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