Understand How Car Leasing Fees, Charges, and Taxes Work

In car leasing, as in buying, there can be charges, fees, and taxes that often surprise newcomers. Fees can differ by dealer, leasing company, and by the state/county/city in which you live. The same charge or fee can sometimes have different names, depending on car company.

Some of the fees charged in leasing are the same as those charged when buying – others are unique to leasing.

Let’s take a look at the most common types of car lease charges, fees, and taxes:

First Payment

A lease is different from a loan in that payments are made at the beginning of the month in which they’re due, while loan payments are paid at the end of the due month. This means you make your first car lease payment in cash at the time you sign your lease contract. The first payment is NOT considered a down payment or a security deposit — it is simply the first monthly payment on your lease. Your second payment will be due one month later. Your last payment is due a month before your lease ends.

Down Payment (Cap Cost Reduction)

While not a fee, a down payment is part of the cash paid at the time of lease signing. Most leases allow the option of making a down payment — or not. A down payment is not a deposit but simply a way of pre-paying part of the lease to reduce the monthly payment amount. Don’t confuse down payment with the total amount of cash due at lease signing, which can include some of the other fees discussed below.

Security Deposit

A few, but not all, car leases require an up-front cash security deposit. It’s a fee that is usually about the same amount as, or a little more, than the monthly payment amount. The fee will be refunded to you at lease-end, less any disposition, mileage, or damage charges.

If you have a good credit score or have leased with the same finance company before, you will not have to make a security deposit.  You should know your credit score so that you don’t have any surprises. There are actually 3 credit bureaus that report your credit. You can see all 3 bureau reports and 3 scores with a $1 seven-day trial instantly online with a simple enrollment in CreditReport.com.

Acquisition Fee (Bank Fee)

An acquisition fee, sometimes called a “bank fee,” is an administration fee charged by a car leasing company, much like “points” or an “origination fee” on a mortgage. It is often not explicitly shown in your contract, but is included in your Cap Cost. You should ask about it if you don’t see it mentioned. However, it is becoming more common for the acquisition fee to be listed and charged as part of the up-front “due at lease signing” cash, although you may have the option of rolling it back into the lease if you want.

This fee is typically in the range of $495 to $995, with averages in the $595-$795 range depending on the car company. High-end luxury vehicles have higher acquisition fees than lower priced cars. Although this fee is set by the lease finance company, dealers sometimes “bump” the fee to add a little extra profit for themselves. If you feel this fee has been “bumped” by the dealer, you can attempt to negotiate it down. Otherwise, acquisition fees are not negotiable.

Disposition Fee

This is a typical leasing fee, set by the car lease finance company, that is due at the end of the lease to compensate the leasing company for the expenses of selling or otherwise disposing of a returned lease vehicle. Normally the fee is not required if you decide to purchase your vehicle at lease-end, although a few leasing companies also require it even then. In this case, try to negotiate it out of the deal. $350 is typical for this fee. Some lease companies, such as Honda, do not charge a disposition fee (at the time of this writing). If you made a security deposit at the beginning of your lease, it can be applied at lease-end to pay your disposition fee.

Sales Tax

If you make a down payment (capitalized cost reduction) on your auto lease, you will be charged state and local sales tax on the down payment amount in most states and in Canada. It is payable at the time you sign your lease contract as part of your “due at lease signing” amount.

Although most states only charge sales tax on individual monthly payments (and down payment, if any), some states, such as Texas, New York, Minnesota,  Ohio, Georgia, and Illinois, require the entire sales tax to be paid up front, based either on the sum of all lease payments or on the full sale price of the vehicle, depending on the state. Georgia now has a new up-front ad valorem tax but no monthly or annual taxes. Customers often choose to roll up-front taxes back into the capitalized cost and finance it with the lease. See below for more details.

If you trade in a vehicle at the time you lease or buy a new car, you are given sales tax credit for the value of the trade-in in many states.

Registration, License, Tag, and Title Fees

These are required official fees and are the same fees you pay in your state whether you lease or buy your new car. There are no separate or special fees for leases.

Tag, title, and registration fees are official fees required by state and local governments. Dealers simply collect the fees, without markup, and pass them along to the appropriate government agencies. These fees are not negotiable.

Some fees charged by dealers are not official fees but are often given official-sounding names, but are actually extra dealer profit. It’s often difficult to determine which are official and which are not. The “extra profit” fees can often be negotiated.

Doc Fees

Documentation fees (“doc” fees) are typically charged by dealers as a kind of administrative fee. The fee amount ranges from about $250 to $600, much of which is simply added profit for the dealer. Many dealers have the fee pre-printed on the sales form to make it seem official. Some dealers are willing to reduce or waive documentation fees, and others simply refuse to negotiate as a matter of company policy.

When are Fees and Taxes Paid?

When a lease contract is signed, there are certain fees, taxes, and charges due as up-front cash. These include the first month’s payment, any down payment, sales tax on the down payment, any security deposit, and official state/county license/tag/registration fees. The lease acquisition fee is sometimes included as well.

The total of all these fees are usually called “lease inception” fees, “cash due at lease signing”, or “drive out” costs.

Notice that a down payment is only part of the total “due at signing” amount. Let’s say it another way so that it is clear — down payment and cash due at lease signing are NOT the same thing. Down payment is only part of cash due. This sometimes confuses car leasing consumers.

Official tag and registration fees are usually collected as up-front cash. These fees are not included in the lease payments you might see as part of a TV commercial, on a car company web site, or newspaper ad. Even if you see a “zero down” lease deal, you still must pay the official fees at the time of signing.

The disposition fee is collected at the end of the lease when a vehicle is returned to the lease company and, in some cases, when the vehicle is purchased. Some states charge sales tax on the disposition fee when it is paid. Any charges for excess miles or wear-and-tear may also be taxed, depending on the state/county.

Security deposits are returned by the lease company at the end of a lease, unless you have excessive wear and tear or are over mileage, which case the deposit is used to help pay those penalties. Security deposits are not taxed.

Sales Taxes and Leasing

All U.S. states (except New Hampshire, Alaska, and Oregon) and Canada impose a sales tax on motor vehicle purchases by consumers. In the case of leasing, the lease finance company passes the sales tax along to you, the lessee, even though they, the lease company, is the actual owner of the vehicle. However, the way it’s done can be quite different from state to state, even region to region.

The most common method is to tax monthly lease payments at the local sales tax rate. This means you only pay tax on the part of the car you lease, not the entire value of the car. For example, if your local sales tax rate is 5%, simply multiply your monthly lease payment by 5% and add it to the payment amount to get your total payment figure. A few states do it differently (see below).

As a side note, with this method you are paying sales tax not only on the depreciation amount of your payment, which is fair, but you’re also paying tax on the finance charges, which is not so fair. This is an area that begs for changes to state tax laws.

Canadians pay sales tax (PST + GST) only on monthly payments, as in most of the U.S.

It Depends on Where You Live

In some states, such as Georgia, you pay sales tax up front on the capitalized lease cost, or lease price (see Georgia Car Lease). In other states, such as Illinois and Texas (see Texas Auto Leasing), you actually pay sales tax on the full value of the leased car, not just the leased value, just as if you were buying it. In Illinois, you will pay monthly taxes as of January 1, 2015 (see Illinois Car Lease Tax).

In New Jersey, you have a choice of paying up-front taxes on either the full purchase price or the total of lease payments. In New York, Minnesota, and Ohio, you pay tax up-front on the sum of lease payments (see New York Car Leasing and Ohio Car Leasing for more details).

Some states, such as Ohio, tax all non-official fees; others, such as Minnesota, don’t. Most states tax the lease acquisition fee; a few don’t. Some states, have a cap on the total amount of taxes paid. Some allow a tax credit for trade-in vehicles, others do not.

Generally, you pay sales taxes for the locality in which you live and will “garage” the car, not the locality in which the car dealer has his showroom or where you lease. You cannot avoid sales tax by leasing in one state and “garaging” the car in another.

If you move to a new state or county at any time during your lease, your taxes and your monthly payment may change – up or down – and, in some cases, require a cash payment when you register the car with the state DMV. If you plan to move soon, contact the taxing agency in the state to which you’ll be moving to determine how it will affect you and your lease.


Car lease fees and taxes can vary by car dealer, car company, and by the locality in which you live. Some fees are negotiable, some are not.  Some can be rolled into a lease, some cannot.

Please read the next section, Lease Contracts.


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