Dave Ramsey is a noted financial guru in certain circles. I’ve read his book, he has some very good tips on how to keep your budget under control, and it is filled with stories of people who have made amazing financial recoveries using his advice. But he is not your personal financial advisor. Rather, he is a blanket financial advisor. One size fits all. His target audience are those in deep financial peril because of their own bad money management and simply spending more than they have. His advice is also strangely intertwined with religion, with his workshops often taught in church basements and fellowship halls across Middle America. People listen to him because he somehow comes across as having some sort of moral authority on the topic of finances. But more on that later.
In his latest Buzzfeed style top ten list that I’ve seen floating around Facebook at this year end, Top 10 Things Americans Wasted Money on in 2015, he again gets car buying wrong for most people. In his blurb about leasing, he just gets it wrong in general. Let’s start there.
Auto companies make more money when you lease the vehicle than if you just buy it outright.
Huh? The auto companies do not even own the car when you purchase or lease it, the dealer does. The dealer paid for it before it was even dropped off at the dealership. It’s a set price, listed on the invoice, maybe minus a holdback and possibly dependent upon whether or not the dealership chooses to participate in manufacturer advertising or not. But the price definitely doesn’t depend on whether the dealer intends to sell the car, lease it, demo it, or just let it sit and rust. Now, one cost in the sale that the manufacturer does participate in are the rebates. And admittedly, there are usually one set of rebates for purchase and one for lease. Sometimes one is higher, other times the other, but they’re typically comparable, and keep in mind these programs change every month depending on what the auto makers think is the best strategy to move units in the current market. But let’s just say this is what he’s talking about, and in a certain scenario on a certain vehicle in a certain month, the lease rebate is $3500 and the purchase rebate is $4250. From a consumer standpoint, the $3500 makes a much bigger impact on a 24 or 36 month lease payment than the $4250 does on a 60 or 72 month loan payment, so it’s still a win even though technically the manufacturer is coming out $750 ahead on the lease. But I honestly don’t think Ramsey has enough auto industry experience to comment on this, so I don’t think this is the point he was making anyway. I think he’s just making stuff up or repeating something he’s heard. And as I pointed out, just as often it would go the opposite way and the lease incentive would exceed the purchase incentive.
Next he states about leasing:
They charge super high interest rates
Super high? Hmmm. Well, no. Leasing rates, often computed as money factors can be a bit confusing. To me, the craziest thing is that they are not disclosed on the lease agreement the way that APRs are required to be on the Retail Installment Sale Contract by the federal Truth in Lending Act. Instead, the total finance charge on a lease is buried somewhere towards the middle as a line item called “rent.” Good luck trying to compute it from there. But I can tell you that currently the lease rates are just as favorable as loan rates. They range, depending on the current month’s program, anywhere from less than 1% up to 3-4%. So, definitely not super high. Just like any other situation where credit worthiness is evaluated, you could pay more if you have poor credit history. But back to Ramsey’s point, it’s often not even the manufacturer that is collecting that interest. Your lease may be through Wells Fargo, Ally Bank, U.S. Bank, or whatever. And if you are going through a manufacturer entity like Honda Finance Exchange or Toyota Motor Credit, you’re likely paying an even lower artificial “incentivized” rate.
He goes on:
and structure the deal so you pay more for the car than it depreciates. The result is a sweet profit for them.
Ok, time for some leasing 101 so that I can explain why this statement is so incorrect. In a lease, you simply pay the difference between the negotiated sale price of the vehicle, minus any rebates or money down, and minus a predetermined residual value. So say you get the vehicle for $30,000, and the rebate is $3000, and you put $3000 down, and the residual value is $14,000, then your lease payment is based on the remaining $10,000. This amount is of course subject to applicable state taxes and finance charges. The predetermined residual value is calculated as a percentage of MSRP, and really is just a best guess. The actual value of the vehicle at lease end will be determined by the market and other factors such as how many miles you’ve put on it. But this is the beauty of leasing, because the lease company is held to this number regardless of the market, not you. They have all the risk, you have none. In fact you get to play both sides of the coin, and can benefit from a strong market while not losing from a weak one. For example, let’s say that residual value of $14,000 ends up being high, and it’s only worth $10,000. You just walk away, and they take the loss when they sell it. But if it ends up being worth $18,000, you still have the option to buy it for the contractual $14,000, and you can actually make money off the transaction. So if, as Ramsey says, the situation occurs where you do pay more than it depreciates, you can actually get that money back.
Then he concludes:
For you, it’s the most expensive way to operate a vehicle. Steer clear of this setup.
Leasing absolutely is not the most expensive way to operate a vehicle. Just compare lease payments to buy payments. Then factor in that the lease will be under warranty for the duration of your driving experience, and may even include maintenance. But yes I know, he’s not comparing payments. He wants you to have no payments. He wants you to drive an old broken down beater and behave like the POS broke loser you are.
Here’s his advice on what you should do if you have a car payment. Keep in mind, there’s no qualifying this statement. This is his advice for everyone:
Experian reports that the average car payment is $483 a month! If you’re paying on your car, you’re paying too much. Sell the vehicle and buy something used with cash. Then you can save that $483 a month, upgrade to a $6,000 vehicle in one year, and be well on your way to driving cash-only cars for life.
So take a hit by selling your reliable newer vehicle that is likely under warranty, and buy yourself an older, less safe, less reliable vehicle that you will hate driving, and spend tons of money on repairs instead of on building equity. But don’t lose heart, because someday you might be rolling in a sweet $6000 Dodge Stratus!
My biggest problem with his advice is that there’s no grey area with him. No adjusting the advice to apply to different situations. If you have a car payment, sell the car. Period. The thing is, this may actually be ok advice for certain people in certain situations, but for most people it’s just not. First off, most people in financial peril can’t sell the car for what they owe anyway. And let’s face it, not everyone is a Jalop. Lots of people aren’t comfortable selling a car on their own, and dealing with a buyer that could be a scammer, and dealing with a payoff and transfer of title. Likewise, lots of people have no business buying their only mode of transportation from the sketchy world of budget car lots, or worse- craigslist. And most people are ill-equipped to deal with a breakdown when it happens. For a Jalop, it’s no big deal. But for someone who is not a car person, it can be a very rough life event. Where do you take it? How much will it cost? How much should it cost? How will I get to work and pick the kids up? I maintain that most people on a budget belong in a safe, reliable, newer car with a warranty. If that also comes with a fixed monthly payment, that’s a good trade off.
By the way, here’s a little insider secret: you lose money every time you trade cars. It’s difficult to save money by making yet another large purchase. We had to explain this to people everyday during the high fuel prices around 2008. People wanted to trade their gas guzzling trucks for fuel efficient small cars, and were often not able to do so because of their equity position. We had to explain to them that selling their trucks while their values are low, and paying a premium for fuel-sippers while their values are high just won’t save you any money overall anyway, no matter the MPG difference.
But Ramsey’s advice has little to do with savvy car buying, and more to do with a life philosophy of being debt free as a Christian virtue. Imagine your pastor is leading a Dave Ramsey workshop, and he’s telling you that having a car payment is dangerous, reckless, and wrong. He’s telling you that it’s a sign of weakness and poor judgment. He’s telling you that you’re being showy and conceited by having such a nice car that you don’t deserve anyway. He’s basically telling you that it’s a sin. He’s backing these claims up with scripture. I guess with that sort of pressure, you just do what he says.
Photo credit- moneywatch.us
JCAlan is an automotive professional with nearly two decades of dealership experience. He also has a business degree, and has never been bankrupt. He is certified by the Association of Finance and Insurance Profressionals, and knows how to write a great sounding three line bio.