Buying an automobile is always a huge deal, no matter where in life you are, but it is definitely extra-special if it is your very first car. This makes it all the more important for you to look into all the pertinent details such as the car model and ways you will finance the car, among others. Both buying and leasing cars have their own set of advantages and disadvantages, but the factor one really needs to consider is the financial one. So, how does one figure that out?

For instance, let us have a look at the cost differences between leasing and buying a car that costs $20,000 for 5 years. The same 6% rate is assumed on both, the new vehicle loan (which is paid off in 3 years) and the lease (two leases of 3 years each), and the driven number of miles per year is 12,000.

1. Monthly income/cash flows

Leasing vehicles often end up having lower monthly payments as compared to financing a vehicle with the same loan terms. This happens because, in leasing, lessors are not paying for the whole vehicle cost but rather the depreciation of the car during those years. So, if one requires access to more cash per month, then leasing might be a better option for them. For instance, in the example above, the monthly car loan payment comes to $608, while the lease amounts are $350/month for the first 3-year lease, followed by $385/month for the second 3-year lease.

2. Money for initial fees and down payment

In most of the lease agreements, lessors can get the dealers to waive down payments or the leases end up having smaller down payments as it is. So, lessors will end up paying less for the sales tax on a lease as well. When the down payments themselves are lesser, then leasing has a smaller impact on cash balance and budgets as it is. In the instance above, the down payment is $3,000 in the loan, while it is $2,000 for the lease.

3. Vehicle usability and driving amounts

If one drives a lot, let’s say more than 10,000–15,000 miles (as per lease agreements), then lessors will probably end up paying extra per mile. Many leasing companies charge as much as 15–20 cents/mile for extra miles, but one could end up paying less (let’s say 10 cents/mile) if one buys them upfront when they’re negotiating the lease contract. The extra mileage penalty might sound daunting, but if lessors plan on trading cars, then they will be penalized for the above-average mileage too. In the example above, if one drives the car more than 5,000 miles over the agreement, then at the rate of 20 cents per mile, it will cost them $1,000.

4. Car wear and tear

If one is prone to getting scratches on the car or seems to be running their cars into one hazard or another, then they had better not lease a car, for it would cost them a fortune in wear-and-tear fees. These fees depend on individual agreements but are usually limited to a total of 3 months’ lease payments. For instance, in the example above, there aren’t any wear and tear charges. However, if one wasn’t able to keep the car free from damage, then the equivalent of 3 months’ payments is $1,155.

5. Duration of car usage

If one wishes to drive the car only for a few years, then leasing is better, but one needs to make sure that they get good terms on their lease.