You get quoted, say, 9.9%. You run the numbers and the real rate comes out at 11% or 12%, and you wonder if you have made a mistake. You almost certainly have not. That gap is the whole point, and here is what causes it.
Flat rate vs effective rate
The number on most quotes is a flat or comparison rate. The effective rate is the reducing-balance rate, the true cost of the finance, the same way a mortgage or a normal car loan is measured. As you pay a loan down, interest is charged on the shrinking balance, so a flat rate always understates what you are really paying.
They are not the same number, and the effective rate is the one that matters.
What gets baked in
A few things push the effective rate above the headline. Broker commission and establishment fees are often capitalised into the amount financed, so you pay interest on them. The residual (the lump sum at the end) changes the shape of the repayments. And some providers simply quote a rate that was never meant to reflect the real cost.
A real example
On one recent quote we checked, a customer was told the rate was 9.9%. Worked properly, reducing balance with the residual on the end, the effective rate was about 11.2%. Not a mistake, just the difference between the quoted number and the real one.
On cheaper cars the gap is even wider. We have seen small EVs come out near 19% effective, because the fixed fees are a much bigger slice of a small loan.
How to work it out
Three things trip people up. The amount financed is not the FBT value of the car, it is the drive-away price minus the GST the leasing company claims back. Only the lease rental line is finance, the servicing, tyres, fuel and insurance lines are running costs. And you have to include the residual as a lump sum at the end. Put those into a reducing-balance calculation and you get the real rate.
Or just upload the quote and we will do it for you, the same standardised way for every provider.