Dave Ramsey Warns Against Paying a Hidden Interest Fee While Leasing a Car
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According to personal finance expert Dave Ramsey, 78% of cars that leave a new dealer’s lot are leased. But Ramsey argues leasing is simply not the best idea for most people.
A main reason, he said, is that leasing is essentially like borrowing money. While some car leases give you the option of buying the car when the lease is up, Ramsey argues that this option will actually end up costing you more in the long run, since you still have to make the monthly payments throughout the lease term.
Let’s take a closer look at leasing and financing, its drawbacks, and why it still might make sense for some people.
Buying vs. leasing a new car
When you lease a car, you have to return it when the lease is up. It’s basically like making monthly payments to borrow the car for a set period of time.
Leasing is also different from getting a car loan, because with a loan you make monthly payments but keep the car when it’s paid off.
Dave Ramsey also claims that when you do the math, most people are paying, on average, a 14.2% interest rate to lease, but don’t realize it. He says this because when you lease you are "renting money" and the dealership does not actually have to inform you how much interest you are paying.
The leasing process
Leasing can seem like an appealing idea to some people even though it may not be the best option. If you’re considering leasing, it’s important to be familiar with the process—so here’s a basic rundown of how it works.
According to Dave Ramsey’s website, many people choose to lease because they want to drive a car they wouldn’t otherwise be able to afford.
Typically, people get the funds from a credit union or bank. Financing can also be done through the car dealer, but this means the dealer is able to control the terms, which may not benefit the person leasing the car (the lessee).
Next, the dealer may try to negotiate the lease price and interest. The lessee makes a down payment. A higher down payment means lower monthly payments, The lessee may also be required to pay the first and last months’ payments up front.
Once the lessee has the car, he or she needs to keep the car in good condition and not go over the mileage limit. When turning a car in, the lessee must pay a disposition fee and any other fees he or she might have built up during the course of the lease.
Dave Ramsey’s case against leasing a car
Dave Ramsey noted few more reasons why he believes leasing is not a good idea:
- All cars go down in value. The loss in value is factored into the lease payment so that the leasing company does not lose money.
- If you want to get out of a lease early, you’ll have to pay expensive fees.
- If the dealer is doing the financing, they can mark up the interest rate by a small percentage. It may not seem like a big deal, but it can cost you thousands more dollars in the long run.
When leasing a car makes sense
Even with all these arguments against leasing, it still may make sense for some people in certain situations.
Investopedia points out that leasing payments are generally lower than the monthly payments on a new vehicle, which is one reason it’s an attractive option.
Some people also like that leasing means you can drive a new car every few years. In addition, most of the car repairs are covered when you take out a lease.
If you use your vehicle for business purposes, you’ll probably get more tax write-offs with a lease than you would with a loan—because you can deduct both the financing costs and the depreciation (reduction in value over time) that are part of each monthly payment.
Consider your options
Before deciding to buy or lease, make sure you have taken everything into consideration so that you can make an informed decision. Take a close look at what you can afford and what your car preferences are.