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Leasing vs. Buying

Up-Front Costs

Leasing Buying
Up-front costs of leasing a vehicle may include the first months payment, a refundable security deposit, a capitalized cost reduction (like a down payment), registration fees, taxes, and other charges due at lease signing or delivery.
Up-front costs of buying a vehicle may include the cash price or a down payment, taxes, registration fees, and other charges.
Capitalized cost reduction. A capitalized cost reduction is the sum of any cash down payment, net trade-in allowance, or rebate that is subtracted from the gross capitalized cost. The remainder is the adjusted capitalized cost of the lease. A capitalized cost reduction reduces your monthly payment by (1) decreasing the amount of depreciation and any amortized amounts that you pay as part of your monthly payment and (2) decreasing the total rent charges by lowering the beginning lease balance (the adjusted capitalized cost), thereby reducing the average lease balance over the term. Cash price or down payment. The full cash price must be paid when you purchase the vehicle, unless you obtain financing. If the vehicle is financed by either the seller or a third party, a down payment is often required. The remaining cash you must pay for the purchase or the amount you must finance may be reduced by a net trade-in allowance or a rebate.
Taxes. Several types of taxes may be due at lease signing, depending on the taxation rules of the state and the policies of the lessor, such as
  • State sales tax on any capitalized cost reduction
  • County or other local taxes
  • State sales tax on the adjusted capitalized cost
  • State property tax on the vehicle.
Instead of paying for these taxes at lease signing, you may have the option of having the lessor include them in the gross capitalized cost, thereby increasing your monthly payment.
Sales taxes. State and local sales taxes are typically assessed on the full purchase price. However, if a vehicle is traded as part of the purchase, sales tax may be assessed on only the purchase price minus the trade-in value, depending on state law. You may have the option of having the creditor pay the sales tax and include it in the amount financed, thereby increasing your monthly payment.

Other taxes. Several other types of taxes may be due at purchase, depending on the taxation rules of the states, such as

  • County or other local taxes
  • State property tax on the vehicle.
You may have the option of having the creditor pay these taxes and include them in the amount financed.
Other charges. Several other types of charges may be assessed at lease signing, such as
  • Vehicle license and registration fees
  • Vehicle title fee
  • Documentation fee
  • Lessor acquisition fee.
Other charges. Several other types of charges may be assessed at purchase, such as
  • Vehicle license and registration fees
  • Vehicle title fee
  • Dealership documentation fee
  • Credit application fee.
Optional insurance and services. You may be offered optional insurance products and other services when you lease a vehicle:
  • Credit life and disability insurance
  • Unemployment insurance
  • Gap coverage (may already be included)
  • Vehicle maintenance services
  • Vehicle service contract or mechanical breakdown protection
  • Other services or insurance coverages.
For any products or services you select, you may be able to purchase them from the lessor or from a third party. If you purchase them from the lessor, you may have the option of including them in the gross capitalized cost (and paying a rent charge on them) or paying for them at lease signing.
Optional insurance and services. You may be offered optional insurance products and other services when you purchase a vehicle:
  • Credit life and disability insurance
  • Unemployment insurance
  • Gap coverage (usually not included)
  • Vehicle maintenance services
  • Vehicle service contract or mechanical breakdown protection
  • Other services or insurance coverages.
For any products or services you select, you can purchase them from a third party or from the creditor. If you purchase them from the creditor, you may have the option of including them in the amount financed (and paying interest on them) or paying for them at purchase.
First monthly payment. Most leases (other than single-payment leases) require you to make monthly payments in advance at the beginning of each monthly period. That stipulation is why the first monthly payment is typically due at lease signing. Some leases require that the last monthly payment or several of the last monthly payments of the term be paid at lease signing.

In a special type of lease called a single-payment lease, you pay a single large payment at lease signing instead of making monthly payments over the term of the lease.

First monthly payment. Most finance agreements require you to make monthly payments at the end of each monthly period. That stipulation is why the first payment is not made at purchase.
Refundable security deposit. Most leases require a security deposit at lease signing. However, lessors may waive the security deposit for repeat customers or for those paying a higher rent charge. The security deposit may be used by the lessor in case you default or at the end of the lease to offset any amounts you owe under the lease agreement. Security deposits are often set by rounding the first monthly payment to the next higher $25 or $50, although the security deposit may be any amount the lessor establishes. Some lessors offer the option of obtaining lower rent charges and a lower monthly payment if you pay a higher security deposit. Security deposits usually do not earn interest. Refundable security deposit. Finance agreements do not require security deposits.
Prior lease balance. The balance due under a previous lease agreement after the value of the previously leased vehicle has been credited. If the lessor agrees to buy your previously leased vehicle, you will have to pay any prior lease balance unless it is included in the gross capitalized cost. Prior lease balance. The balance due under a previous lease agreement after the value of the previously leased vehicle has been credited. If the seller agrees to buy your previously leased vehicle, you will have to pay any prior lease balance unless it is included in the amount financed.
Prior credit balance. The amount due under a previous finance agreement after the value of the vehicle traded in on the lease has been credited. If you trade your previously financed vehicle when you lease, you will have to pay any prior credit balance unless it is included in the gross capitalized cost. Prior credit balance. The amount due under a previous finance agreement after the value of the vehicle traded in on the new finance agreement has been credited. If you trade your previously financed vehicle when you finance another vehicle, you will have to pay any prior credit balance unless it is included in the amount financed.

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Last update: May 5, 2003