Part 7: Taxes and Fees Don't let the various taxes and fees
In car leasing there are miscellaneous
tax, charges, and fees that the average consumer is unfamiliar with.
To compound this confusion, these can differ by leasing company and
by state, and the same fee can have several different names.
Don't let these fees scare you away from leasing.
First Payment - One way that a
lease is different than a loan is that payments are due at the beginning
of a month for a lease, and at the end of the month for loans.
This means that your first lease payment will be due at signing.
It also means that you do not have a payment due at the end of the
lease. The first lease payment should not be confused with a down
payment or a security deposit.
Security Deposit - The security
deposit is a refundable amount that is typically equal to one month's
lease payment, rounded up to the nearest $25. The security deposit
is due at signing. If you have a good credit rating or are a
repeat customer, the security deposit is often waived. A security
deposit is different than a down payment, which is not refunded at the
end of the lease.
Acquisition Fee (Bank Fee) - This
is an administrative fee that is charged by the leasing company.
This fee is typically added to the cap cost and increases your monthly
payments. You can pay it up front if you want to. This fee
usually ranges from $250 to $895, and may be higher for used vehicles.
Sometimes, lessors will waive the security deposit in exchange for a
higher acquisition fee. Acquisition fees on loans are
typically higher than bank fees on auto loans, but the Money Factor is
usually lower than the interest rates on loans. Added together,
the effective annual interest rate, between leases and loans are
typically very close.
Cap Cost Reduction (Down Payment) - One of the benefits of leasing
is that in most cases you do not need to make a down payment.
However, you do have the option of making a down payment, which is
called cap cost reduction in the leasing world. Any money down
will reduce your monthly lease payment.
Cap Cost Reduction Tax - In most states, you only pay sales tax on
the portion of the vehicle that you are using. When you make a
down payment in these states, you must pay sales tax on the down
payment. This tax is due at lease signing.
Documentation, Registration, License, Tag, and Title Fees - These
fees are typically the same whether you lease or purchase. These
fees typically include actual fees paid to state governments, plus a fee
to the dealer for taking care of all of the paperwork.
Due at Signing (Initial Lease Fee) - The lease contract will spell
out what is due at signing, sometimes called the initial lease fee.
The amount due will include the first payment, any security deposit,
any down payment, any sales tax on the down payment, documentation,
registration, license, tag and title fees, and the acquisition fee if it
is not capitalized. Due to the wide variety of fees that may or
may not be due at signing, this amount can vary significantly from lease
Disposition Fee - Most leases contain a fee that is due at the end
of the lease to compensate the lessor for the expenses of disposing of
the vehicle. Many leases also include a similar fee if you decide
to purchase the vehicle at the end of the lease. The typical fee
ranges from $250 to $450.
Sales Taxes - When you purchase a vehicle, you pay sales tax based
on the MRSP or purchase price. When you lease a vehicle, the sales
tax is collected a variety of different ways by different states.
The most common method is for the sales tax to be added to the monthly
lease payment. In this case, you are paying sales tax on the
amount of the vehicle that you are using up ( cap cost - residual).
While you are also paying sales tax on the interest charges, you are
still paying less sales tax than if you purchased the vehicle.
In some states, such as Ohio, you pay sales tax up front on the
capitalized lease cost. In other states, such as Texas and
Illinois, you pay sales tax on the full value of the leased vehicle,
just like you were purchasing it. And in some states, such as New
Jersey, you have the choice of paying up-front taxes on either the full
purchase price or the total of lease payments. To confuse matters
even more, you can sometimes capitalize the upfront taxes into your
Please call us if you have any questions about sales taxes.