Understand How Car Leasing Fees, Charges, and Taxes Work

In car leasing, as in buying, there can be charges, fees, costs, 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.

Most of the fees charged in leasing are the same as those charged when buying – a few 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 to your dealer 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 (Capitalized 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 receive any surprises when you visit a dealer.

Get your Experian Credit Report FREE at freecreditreport.com.

Some lease companies allow you to make a security deposit as a way of reducing your finance rate (money factor). The larger the deposit, the lower the rate. This is a good deal if you have poor credit and have the cash to spare. The money is returned to you at the end of the lease.

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 Capitalized 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 an up-front title ad valorem tax but no more 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.

Property Taxes

Some states have annual property taxes (often called “ad valorem” tax) that apply to automobiles, purchased and leased. Technically, such taxes are the responsibility of the owners of leased vehicles, which are the lease finance companies (lessors), but common practice is that the taxes are paid by the lessees, just like all other official fees and charges.

In most states that charge property tax on leased vehicles, the lessee is billed directly, just as if he owned the car. In other states, the lessor (lease finance company) is billed and pays but, in turn, bills the lessee for reimbursement.

Doc Fees

A documentation fee (“doc” fee) is typically charged by dealers — as a kind of administrative fee — for both purchased and leased vehicles. 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.

Dealers often have fees such as “bank fees” or “prep fees” or “delivery fees” that are completely bogus and should be negotiated out of any car purchase or lease deal.

Dealer Add-On Products and Costs

Just when you think you’ve negotiated your best deal on your new car, you are ushered into the Finance Manager’s office and subjected to a series of high-pressure sales spiels for high-cost, high-profit add-on products and services that can quickly increase your cost if you agree to them. Examples are various “protection” plans or products such as window VIN etching, paint sealer, extended warranties, fabric protectant , rust proofing, credit insurance, or lease wear-and-tear coverage. Generally speaking, these products are overpriced and not worth the cost, and in some cases, absolutely worthless.  We advise that automotive consumers don’t buy these products. In many cases, the products can be purchased elsewhere at much less cost.

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 cash “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 collected at the beginning of a lease but returned by the lease company at the end of your lease, unless you have excessive wear and tear or are over mileage, in 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 (often called a “use 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 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 a title ad valorem tax up front on the capitalized lease cost, or lease price (see Georgia Car Lease for recent changes). 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).

In Virginia, you pay full sales tax up front and receive no sales tax credit for your trade-in vehicle. Depending on the county in which you live, you may also pay a personal property tax that, strangely, is billed to you twice a year through your lease finance company.

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.

If you are trading a car, some states allow you sales tax credit when leasing, although the way in which the credit is calculated varies.

Generally, you pay sales taxes for the locality in which you live and “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.

Some states also have annual property taxes (often called ad valorem tax) in addition to sales tax.

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.


Finally, Don’t Forget Insurance

Although auto insurance is not one of the fees charged by a car dealer, you won’t be able to drive your car off of the dealer’s lot if you don’t have proof that you have purchased insurance that covers your new vehicle — whether you lease or buy. So, in this sense, it is one of the initial fees.

Since leasing (or buying with a loan) requires you to have full coverage insurance and rates vary widely for such coverage between insurance companies, it pays to get free quotes from different companies.

Get free online auto insurance quotes from Esurance and from Liberty Mutual InsuranceAdvertisement.

Based on the quotes you receive, go with the best deal.


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

To find current information about official fees and sales tax when leasing a car in your state,  search online for your state’s Department of Motor Vehicles and Department of Revenue web sites.

Please read the next section, Lease Contracts.


adminCar Lease Fees and Taxes Explained