I was listening to The Dave Ramsey Show on my ride into work. Dave took a call from someone who tried to convince him that whole life insurance is a good idea. Besides the fact that neither Dave nor the caller changed their opinions by the end of the call, it was amusing and informative. Among other things, Dave said that a whole life policy is a bad financial decision, just like he thinks it’s always a bad financial decision to lease a car. Dave’s comment about car leases was not the point of the call, but it stuck with me. For more on Dave’s opinion re car leases (including the quote below), check out his post here.
“Broke people think ‘how much down and how much a month’. Rich people think ‘how much’. If you can’t pay cash for a car, then ride a bicycle. But don’t lease a car.” – Dave Ramsey
Here are the main reasons that car leasing isn’t a good idea.
1. You should accumulate assets that go up in value
A car is an asset that begins depreciating the minute you drive it off the lot (and continues to depreciate over the life of the car). I want to build up my assets and build wealth. After reading Rich Dad, Poor Dad by Robert Kiyosaki, I know that I need to accumulate assets that increase in value over time in order to build wealth. Assets appreciate over time and liabilities depreciate over time. Cars depreciate over time. Leasing a car is like renting an asset that is guaranteed to depreciate in value over time.
2. There’s no ownership
When you lease a car you’re essentially renting it. The car remains an asset of the dealer. You don’t own it. It’s like renting an apartment versus buying a home except that over time a house will generally increase in value and a car will decrease in value.
3. You must pay the full lease amount after an accident (even if your car is totaled)
If you get into an accident with the car you lease, you’re responsible for the repairs and for continuing to pay the full lease payment. If you total your leased car and get money back from the insurance company that is less than what you owe to the dealer, you are still responsible for repaying the dealer the full lease amount. You’ll have less money to buy a new car and still have to continue to pay on the initial lease.
4. Leasing creates the habit of having a car payment
If you get in the habit of paying a lease payment, you’re essentially making a habit of paying for something you don’t own. I believe in creating positive success habits that promote wealth. A car lease works against this habit. Instead, you could take your $350 lease payment and save it until you have enough to buy a car that you own.
5. You’re restrained by miles and time
A lease agreement typically has year and mileage limits. If you go over your mileage but continue to keep the car until you reach the year limit, you’re going to have to pay extra per mile (in addition to your lease). Usually the mileage is pretty limited, such as 10,000 to 15,000 miles per year. And at a rate of $.20-.25 / mile, this can get expensive fast if you don’t budget your miles appropriately.
6. If your leased car is repo-ed and sold for less than you owe, you are responsible for the difference
If something happens and you can no longer make your payments, the dealership will repossess your car and sell it. If the car is sold for less than what you still owe on the lease, you’re responsible for the difference. So, you’ll have to pay the difference and be without a car.
7. The math is horrifying
You have to pay to lease the car at a monthly rate, plus any additional wear and tear on the car as if you owned it. So, if your lease payment is $350 / month, after 60 months, you’ll have paid $21,000. That doesn’t include all of the money you’ll owe for any additional mileage, repairs, and wear and tear.
And if you want to buy the car after your lease is up, you’ll have to pay what it was worth (fair market value) at the beginning of your lease – not at the time you turn it back in.
Finally, you’ll pay interest rates on car leases to make your payments even higher.
A Final Note!
For those of you who are also not going to lease cars anytime soon, I’ve shared a post on the car buying process. Check it out here.