With the average price of a new car nearing $50,000, does it still make sense to write a check, or has leasing become the smarter play? That was the question from Dan, a 65-year-old retiree from South Carolina who called into The Clark Howard Show recently.
“I’ve never leased a car before,” he said. “I can afford to pay cash, finance, or lease. With cars costing $50-plus thousand these days, I’m not sure it makes sense to part with that much of my investable cash. Mileage is not an issue because we’re retired.”
Howard quickly advised against the lease. And he said the very thing Dan considers a feature of his retirement, low mileage, is a reason the lease math works against him.
Howard’s first question: How long do you keep a car?
Before Howard would entertain the lease-versus-buy debate, he zeroed in on one variable: ownership length. If you replace cars roughly every three years and enjoy driving something new, leasing can pencil out, but typically only when there is a factory-subsidized lease deal behind it. Without that subsidy, leasing usually costs more than buying over the same period.
If your habit is to keep a vehicle for the long haul, the answer flips. As Clark put it: “If you buy a vehicle and you like to drive it for … say 5 or more years, just pay cash and buy one. If you have the resources to buy it, keep it simple and just buy what you want.”
For those considering leasing, manufacturer-subsidized lease deals are offers automakers run in national TV spots and on their own websites when they need to clear inventory of a specific model. A subsidized lease comes from the manufacturer eating part of the cost. A “lease special” flagged only at your local dealership is usually a repackaged version of the standard lease with the dealer’s margins baked in. If the offer is not advertised by the manufacturer itself, treat it like any other lease and run the full math, Howard advised.
Why leases get ‘crazy complicated’
Even when the headline payment looks attractive, Howard warned that the monthly number is just one line on a long contract. In his words: “Leases can be crazy complicated. So, it’s not just the price per month, not just what you have to pay up front, not what you have to pay as disposal fee. But you’ve got to look at all the terms and conditions of that lease.”
A fair comparison requires adding the down payment (often called a capitalized cost reduction), the acquisition fee at signing, the disposal fee at turn-in, the per-mile penalty for going over the cap, and any wear-and-tear charges the dealer assesses when you hand the keys back.
The retiree trap: paying for miles you’ll never drive
Leases are priced around a fixed annual mileage allotment, typically 10,000, 12,000, or 15,000 miles. That allotment is baked into the monthly payment whether you use it or not. Howard’s warning to Dan: “In your case, if you’re not driving a lot of miles, a lease may be really rotten for you because you’re paying for miles you might never use.”
A retiree putting 6,000 miles a year on a vehicle is essentially renting an allowance of unused miles every month, then handing the car back with most of its remaining value intact, value the leasing company keeps.
The bottom line for Dan, and anyone like him
Run Howard’s framework against your own situation. If you plan to keep the car for five or more years, drive modest miles, and have the cash, buy. Pay cash if you can do so without draining accounts you rely on for income, or finance at a competitive rate if leaving money invested clears the loan rate after taxes.
If you still want to consider a lease, only entertain offers advertised directly by the manufacturer, and price out every fee in the contract, not just the monthly payment. For Dan, and for most retirees with low annual mileage, the lease math almost never wins, Howard says.
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