Effective Credit Costs in Retail Financial Markets

Leasing Versus Borrowing

Abstract

This study examines reported credit cost information in the automobile sales market to deter- mine if vehicle leasing really is cheaper than installment borrowing. In addition, the study evaluates the accuracy of credit cost data furnished to consumers by commercial banks, vehicle leasingjrms, and automobile dealers to gauge whether any systematic differences exist in the accuracy of reported credit cost information. Results of the study suggest that the cost of leasing is significantly different from borrowing, yet neither financing alternative is unilaterally cheaper than the other. In addition, suppliers of credit in consumerjnance markets routinely and signif?cantly understate effective credit costs reported to consumers.