Dave Ramsey on Leasing Cars

Dave Ramsey on Leasing CarsThe article, Dave Ramsey on Leasing Cars, was formally published by me on the Monthly Car Lease website. Because it was popular, I have decided to re-publish it here. The original article is below:


Asking for advice from Dave Ramsey on leasing a car is like asking a realtor if you should rent your home. Dave Ramsey knows very little about leasing cars. Before I provide the detailed evidence to support my claim, let me make it abundantly clear that I feel no personal animosity towards Dave Ramsey.  This is not a personal attack at all. I’ve spent a fair amount of time listening to Dave Ramsey on the radio. I believe he is a nice guy; a good man, who is knowledgeable in many areas of financing.  I also believe that his heart is in the right place when it comes to helping people get out of debt. For the most part, I believe his information is solid and given with sincere care and love of those he is trying to help. For instance, I really like what Dave has to say about Prenuptial Agreements. This is just one example where he makes it clear that he places more value on people than money. I really admire him for that. However, this does not mean he is an expert at all matters concerning money and people. Unfortunately, when it comes to leasing cars, Dave Ramsey has probably hurt some excellent leasing prospects with the negative, sometimes misleading information he conveys on his radio show and elsewhere. I know that many consumers think of Dave Ramsey as their personal mentor and guru and believe that he, above anyone else in the world, simply wants what is best for them.  I do not disagree with that. I do think Dave Ramsey’s heart is in the right place and he has helped many people. However, it is important to understand that Dave Ramsey is in the business of helping get people out of financial trouble. The last thing he wants to do is promote newer, innovative ways of getting people into debt. Dave is rightly a skeptic on many financial matters involving loans. Car leases are loans, but as I’ve stated many times before, leasing cars is the least risky way to drive a brand, new car. If you’re content with an old car and don’t mind the occasional, repair surprise which sometimes occurs at the most inconvenient time and place, then a used car is right for you. Dave Ramsey, however,  says some things about car leases which prove he really knows nothing about leasing at all. In his blog, Dave Ramsey mentions —the average car payment—  without giving any thought at all to the monthly average payment that still exists when you drive an old car, as I will explain.

Dave Ramsey on Leasing a Car

Dave’s Unreasonable Lease Example

A listener called his show to ask  him how a car lease works.. Rather than an accurate and comprehensive explanation, Dave Ramsey gave the listener an earful about how leasing is a rip-off and should be avoided like the plague. While, he didn’t use the actual phrase, rip-off, isn’t his reply a perfect model and demonstration of the lease skeptic described in my article, Why Lease a Car? For starters, Dave Ramsey used an unrealistic leasing example to make his claim. He tells the listener that a $400 a month lease payment for 60 months costs you $24,000. Most leases are for 24-36 months. 60 month leases are extremely rare these days. Even, a 48 month lease is rather unusual. Indeed, Dave’s example makes it seem as though $24,000 is a lot to pay for a car you are unable to keep. It also causes one to assume there will be some repairs and maintenance costs on top of that because many cars need new brakes and tires after four years, while you are still having to make lease payments. Dave Ramsey is really going over the top and digging numbers out of thin air when he suggests the dealer and finance company are making $9,000 in profit off of the lease. That would suggest we should all be in the car leasing business, wouldn’t it? But much more than that, if it would meant that the dealer is selling you the car several thousand dollars above retail price or the finance company is making record profits. No financing company could charge that much in interest and expect to stay in business. A lease agreement has a sales price which is disclosed at the time of the deal just like with a car purchase on loan. The dealer’s profit is based on the difference between the Dealer Invoice cost and the actual Capitalized Cost or selling price.  We have to remember that it is the leasing or finance company that owns the car at this point, not the dealer. Neither the finance company nor the dealer are going to make $9,000 of interest on the type of car lease that yields a $400 payment.  While it is true, the greatest amount profit will be made by the financing company, it is not nearly as much as Dave Ramsey would have you believe. 

Interest Rates on Car Lease Deals

Dave Ramsey correctly asserts that the interest rate need not be disclosed at the time of the lease. First off, let me mention that in the many, many times that I’ve leased cars, the dealer usually provides me with the interest rate without me even having to ask them for it. If I do ask for the interest rate, they’ll give it to me without hesitation. It is not because car leasing is some type of sneaky or dishonest business that the dealer might not find it necessary to disclose the interest portion of your lease payment. The truth is, that the interest rate is only one part of the leasing formula and is meaningless to an informed consumer who is comparing average car payment versus buying the car outright on a loan. An informed consumer need only looking at the average car payment, without being overly concerned with the complex and sophisticated leasing formula.  Negotiating a car lease is no different than negotiating a car loan deal.  Whether it is a purchase or a lease, the dealers wants to make profit. However, they also need to meet the requirements of an informed consumer in order to make the deal. An interest rate that is too high will adversely affect the payment, so it is in the dealer’s best interest to provide their prospective customer with a competitive rate in order to help them meet their stated, monthly payment budget. When leasing cars, the interest rate is referred to as a Money Factor. The money factor is simply a number they use in the leasing industry to make it quick and easy to calculate the monthly payment portion of your lease.  The money factor is simply the interest rate divided by 2400.  When you lease a car, the interest is a portion of your payment just as it is with buying the car. In a lease, the interest portion of your payment is calculated by multiplying your money factor by the (Capitalized Cost plus Residual Value). The money factor used in a car lease is based on the same going percentage rate for a car loan. Whether you lease or buy a car, Of course, that rate can be affected by the greed of the loan company. In leasing, the interest rate is greatly affected by your credit rating. It is up to the dealer to work at giving you the best interest rate they can.  According to Cars.com, the typical Money Factor for a 36 month lease for a consumer with good credit is .00128. This equates to a 3.08% interest rate. Using these figures, the interest portion on my current, 2012 Honda Accord is $51.20 per month. That comes to just $1,848.00 in interest over the 36 month term of my lease. Now, let’s compare that to a purchase on a car loan. On a 60 month-term, 3.08% would be an excellent interest rate. Even so, the interest cost for the entire 60 month term is $4,000. On a 36 month term, the interest charged is $2,371. This is still more than our lease. Is it possible to get a really bad interest rate on a lease. Absolutely, just as it is possible to get a really bad interest rate on a car loan purchase. In his column, Dave Ramsey makes the case that interest is where you can really get screwed in a lease. Using my example above, I’ve proven that is simply not true. I realize, however, that Dave Ramsey is probably accusing me of doing the same thing I accused him of doing; that is, using an unreasonable example to support my side of the argument. Not so fast.

A Real-Life Leasing Example Using a Subvented Lease

I will confess that the leasing example I used above is not quite accurate. In reality, I got a much better deal than the one shown in the example to Dave Ramsey. Recognizing that my deal probably does not accurately reflect the proto-typical lease, I decided to be as fair as possible and use something which is closer to typical financial numbers to make my case. My current, 2012 Honda Accord SE is costing me $240.00 a month. That payment is with my $2,800 trade-in factored in. My actual monthly bill is only $174.00 including tax. The MSRP of the car is around $25,000 and the Capitalized Cost (Sales Price) is around $23,500. Without having the paperwork in front of me, I am unable to get the depreciation rate and money factors low enough to reflect such a low payment. This illustrates the remarkable savings power of the subvented lease deal. In a subvented lease, the manufacturer uses very aggressive rebates and incentives to help move inventory. These incentives can come in the form of higher than average residual values, sales rebates, or ultra-low, near-0% interest rates. Keep in mind, much of these same, incentives can be used to provide very attractive, new car loan purchases as well. Leasing, however, has the edge in the number of innovative ways, in which affordable car payments can be derived. Subvented deals are not unusual or hard to find. They usually come late or near the end of the 4-year generation  just before the newest model is introduced. For example, my 2012 Accord was leased just as the all-new generation of the 2013 Accord was hitting the lots. The SE or Special Edition comes with some nice additions and incentives such as all-leather interior and heated seats for basically the price of the base, LX model. The extra conveniences are simply a clever idea on the part of Honda to help move their tail-end, last-of-the-generation inventory while newer generation cars are being introduced and sold. However, literally all car makers use incentives to move their last-year, generation, car models. These are usually the best cars to buy or lease. I can say with confidence, however, that you will never be able to save as much driving new cars as you will if you shop for subvented deals from lease to lease.

Recognizing that Leasing is not Right for Everyone

If there is one thing I would like Dave Ramsey to learn about leasing cars, is that it is like any other important purchase decision. You have to be smart about it. Yes, there are bad lease deals just as there are bad purchase deals and investments. You have to ask the right questions and shop for the right deals. With this said, it is also true that leasing is not for everyone. Those who drive substantially more than 12,000 miles a year or have bad credit our probably not going to fare as well with a lease as they would with a low-interest, 60-month car loan. With that said, many successful, prominent companies lease cars and trucks for their employees and company use, despite the cost of driving a higher number of miles. Companies are not all ignorant. They are in business to make money. If leasing makes good business sense for their organization, there is no reason it cannot make sense for the right person. There are a great number of people who have successfully leased cars a great number of years and they are not the ones on their knees, crying for help and asking Dave Ramsey how they can dig themselves out of debt.

Dave Ramsey on Leasing a Car

What he Should be Saying

A better informed Dave Ramsey, who educated himself in the industry of automobile leasing, would be telling his audience that leasing a car can be a very effective financial tool for those with good credit, aim to live on a responsible, monthly budget and prefer the safety, reliability and enjoyment of driving a new car every three years. He would also be telling his listeners that if they are not mechanically inclined, nor have the time to work on cars, leasing is an excellent way to insure they will never be bothered or surprised with repair and maintenance costs and inconveniences. Also, since Dave Ramsey is fond of people’s welfare, he should be telling them that one of the most compelling reasons to finance new cars is to keep their family members safe on the road, particularly if they are required to drive long distances or during the night hours in the dark. Leasing is an attractive transportation option for those who prefer to keep their family members safe and secure in the cars they drive.

Last, but not least, Dave Ramsey can be referring his listeners to the many excellent number of car leasing websites where one can get the information they need to make an informed decision on leasing cars. I am not too bashful to say that this website, Car Lease Tips, is one of the easiest, most comprehensive ways to get the information you need each month to find a car lease that is right for you. In addition to my own site, there are two other excellent places his listeners can visit to get unbiased help in leasing a new car. Real Car Tips and LeaseGuide are a couple of my favorites. Also, Cars.com, is an excellent site for comparing a car lease with a car purchase and getting real-time Money Factors and Residual Values. Do I have a favorable bias towards leasing cars? There is no doubt about it, but it is not nearly so obvious as the negative bias of Dave Ramsey on Leasing a Car.

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