Car Lease Fees and Taxes in Texas

 Leasing a car involves various taxes and fees, and these can vary by state. In Texas, as of September 2021, here are some general guidelines about the taxes and fees you might encounter when leasing a car. 

Please note that laws and rates can change, so it's always a good idea to check the most current information on the Texas DMV web site or consult with a professional.

Taxes

1. **Sales Tax:**

   - Texas imposes a sales tax on car leases, and it is calculated on the total cost of the lease.

   - As of 2021, the Texas state sales tax rate was 6.25%, but local jurisdictions (cities and districts) can impose additional sales taxes, which can make the total sales tax rate to be as high as 8.25% in some areas.

2. **Use Tax:**

   - Some states impose a use tax on the monthly lease payment, but in Texas, the sales tax is typically applied to the total cost of the vehicle lease.

Fees

1. **Acquisition Fee:**

   - This is a fee charged by the leasing company to arrange the lease. It might be included in the total cost of the car or required as an upfront payment.

2. **Disposition Fee:**

   - This is charged by the leasing company at the end of the lease if you choose not to buy the vehicle. It covers the cost of preparing the car for resale.

3. **Security Deposit:**

   - Some leases require a security deposit, which is typically refundable at the end of the lease term if the vehicle is returned in good condition.

4. **Registration and Title Fees:**

   - You will be responsible for paying to register and title the vehicle in Texas, which includes the cost of license plates.

5. **Documentation Fee:**

   - Dealerships might charge a documentation fee for processing the paperwork involved in a lease.

6. **Excess Mileage Fees:**

   - If you exceed the mileage limit set in your lease, you will be charged a per-mile fee.

7. **Wear and Tear Fees:**

   - If the vehicle is returned with damage beyond "normal wear and tear," you may be charged additional fees.

8. **Early Termination Fee:**

   - If you end your lease early, you may be required to pay an early termination fee.

Additional Notes:

- **Insurance:** Texas law requires drivers to have auto insurance, which includes minimum amounts of liability coverage. Leasing companies also typically require comprehensive and collision coverage.

  - **Lease Terms:** Ensure to thoroughly read and understand the lease agreement, including the fine print regarding fees, penalties, and your responsibilities as a lessee.

- **Negotiation:** Some fees and terms might be negotiable, so it’s worth discussing with the dealership to potentially reduce some costs.

Remember to always check the most recent and localized information since tax rates and regulations can change. It's also advisable to consult with a tax professional or a leasing specialist to understand all the potential costs involved in leasing a car in Texas.

Trade Your Leased Car -- Yes It's Possible

 There is common thinking that trading a leased car is not possible because "you don't own the car." 

But in fact, leased cars can be traded just like cars that are financed with a loan.

That said, trading a leased vehicle often doesn't make financial sense because the lease has no "equity." 

When a lease is initiated, the estimated lease-end residual value is set such that the vehicle is never worth more than the amount owed on the lease. And if the residual value was set accurately (by sheer chance), it is exactly the same as the vehicle's market value at lease-end. And during the middle of the lease, there is "negative equity" because of the way the lease payments are structured. 

But things don't always work out the way the lease company predicted or expected.

Sometimes, values of used cars can increase in unexpected ways, such as during and after the recent  pandemic. When this happens, values of leased vehicles (as used cars) can exceed the amount owed on the lease. Form the leasing consumer's point of view this is "equity" or value that can be used in a trade.

The trade of a leased value with "equity" is essentially the same as trading a financed vehicle with an outstanding loan. The dealer pays off the lease (or loan) and gives the customer trade credit for the remaining part of the trade credit. During the pandemic, it was not unusual for cars that had been leased a couple of year before, to have $10,000 or more of trade equity. 

Of course, as time goes on, the situation will return to more normal when fewer leased vehicles will have equity during their lease, or afterwards. But there will always be exceptions. So if you are currently leasing and think you might want to trade, keep a watch on your lease balance and the trade value of your car.

End Your Lease - Buy Your Car

 There are two ways to end a lease (without destroying your credit). One is to do an "early termination" and the other is to do an "early buyout." Actually, there is a third way -- trading your leased vehicle -- but we'll discuss that in another article.

An early termination is simply a way to return your car before the scheduled end of your lease and pay any associated costs. Other articles here discuss this method in more detail.

The second method is to buy your car from the lease company through a process called an "early buyout" (as distinguished from an end-of-lease buyout).

People have different reasons for wanting to end their car lease by purchasing the vehicle, although it usually doesn't make sense financially.  Most often, they feel uncomfortable "renting" their vehicle and not "owning" it. 

Assuming that the desire to buy the leased vehicle comes near the beginning or middle of the lease term, the cost to end the lease and buy the vehicle can be very expensive -- much more than the vehicle's market value. This is because a lease pays off very little of the cost of a vehicle until very near the end of the lease. The result can be that the cost of the early buyout can be much more than the value of the vehicle.  It would have been much less costly to have simply purchased the vehicle in the beginning.

To determine how much an early buyout will cost you, you can simply call your lease company and get an early buyout (not "early payoff" or "early termination') quote from them. Be prepared for a shock. the amount will very likely exceed your estimates, or even your ability to pay.

Because the cost can excedd the "book" value of the vehicle, lenders such as banks or credit unions, may not be willing to let you borrow the entire amount you owe. Therefore, you would be required to make a down payment to make up the difference. 

How to Get Out of a Car Lease

Many automobile consumers find it easy to get into a car lease but difficult to get out.

To get out of a lease usually means a process of "early termination", as lease companies call it. 

Unfortunately, the process is typically expensive. It's similar to being "upside down" on a car loan. More is owed on the lease balance than the vehicle is worth at the time of the desired termination. The customer is responsible for paying this difference.

To get out of a lease early is not the same as exiting at normal lease-end. You can't simply return your vehicle and walk away. 

Your lease company can tell you how much it will cost you to get out early. But prepare to be shocked unless you are very near the end of your lease term. The way in which the lease company calculates the amount you owe (explained in your lease contract), is usually not favorable to you, the lessee. 

The best and least costly way to get out of a lease early is to have someone "assume" your lease. This is a process by which you transfer responsibility for the lease to someone who is interested in taking your vehicle and making the remainder of your lease payments. Your lease company must approve first. Be aware that not all lease companies allow lease transfers.

Finding someone to take over your lease is not as easy as it may sound. There are a number of online companies with names that imply lease swapping or lease trading or lease takeover. They all do the same thing. They help match up lease "sellers" with lease "buyers." There are fees involved but the cost if far less than an early lease termination. One such company is SwapaLease.

When to Get Out of Car Lease

People who want to get out of a car lease do it for a variety of reasons, and at different times in their lease.

Some folks simply realize they don't like the vehicle they just leased, and want out. 

Unfortunately, there are no consumer laws providing for returning motor vehicles. That allows lease companies to make their own rules. For example,  most lease companies have provisions in their lease contracts that prohibit lease termination within the first 12 months.

Many companies also prohibit an early exit within the last few months. This not usually a problem since the cost of simply continuing to make payments can be less than the cost of getting out early, even if you actually return the car early.

In most cases, the least costly strategy is to stick with the lease until the end, when you can simply return your vehicle and walk away. If this is not possible, be prepared to pay for the privilege of an early exit.

[ Note that all car lease contracts contain "fine print" that explains how they determine the cost of an eearly termination, but don't expect to be able to understand it.]

Getting Out of a Car Lease is Not Easy

Why is not easy to get out of a lease?

Leasing is an old business concept that was around long before it was introduced to automotive consumer leasing. The concept has remained virtually unchanged, as has the language of leasing, even though consumer leasing is not quite the same as business leasing.

In the past with business leasing, it was almost unheard of to end a lease early. For example, a business might have leased a construction vehicle for, say, four years, and completed that lease as contracted. Simple.

Because business leases were always completed on schedule and never ended early, some shortcuts could be taken in how lease financing was arranged. A simplified payment calculation that assumed level depreciation was adopted. 

Of course, we all know that any equipment, including motor vehicles, depreciate more rapidly in the first year or two than later. This means that the equipment loses value faster than the lease is paid off. But this didn't matter as long as the lease was completely paid off on the agreed-to schedule.

Enter automobile consumer leasing. 

People want out a car lease early for any one of a number of reasons - don't like the car, like another car, lost job, lost health, divorce, and other reasons. 

Since the same payment methods are used as are used in business leasing, this presents a problem. 

At the time the consumer wants to end his lease, he most likely owes more on his remaining lease balance than his vehicle is actually worth, due to a rapid early depreciation rate. This means, in order to end his lease, he will have to pay the difference between what he owes and the market or auction value of his vehicle. This can often amount to thousands of dollars. On top of that, many leasing companies add a early-termination penalty fee.

If you absolutely must get out your lease early, read our other posts here for possible solutions. If none are found, consider simply riding out your lease until the end when you'll owe nothing more. And by all means, avoid any form of repossession. It will ruin your credit history -- and you'll still owe the money.

Car Lease - The Wrong Way to Get Out

Many people who lease cars often assume that leasing is like renting. Based on that erroneous assumption, they believe they can simply return their vehicle to the lease company if they become unhappy with it, or can no longer afford it.

This is the wrong way to get out of a lease early. To simply return a leased vehicle to the finance company or bank is a form of repossession, sometimes called "voluntary" repossession. This can cause serious damage to the person's credit history. It can create future problems with getting loans, mortgages, and even car insurance.

Furthermore, the lease company will take action to collect the remaining balance owed on the lease after the vehicle has been sold at wholesale auction. The difference can easily amount to thousands of dollars.

By simply returning a vehicle and walking away before normal lease completion, a person can destroy their credit rating, create a financial disaster, and end up with no transporation, all at the same time.

This is not the way to get out of a car lease. Read our other articles here to find out how to end a car lease the right way.

Exiting a Car Lease in a Tough Economy

Any time the  economy decides to take a downturn it creates problems for many people who are now leasing cars. People lose jobs, lose income, or have otherwise become financially distressed. The car-related problems are not unique to leasing but it's somewhat different than for people who are buying a car with a loan.

Leasing is a method of financing that is based on only paying for the amount that a car will depreciate in value by the end of the lease. In fact, the estimated lease-end value is stated right in the contract and monthly payments are based on that value. Therefore, each monthly payment, unlike with a loan, is pre-determined based on the assumption that the lease will be completed as scheduled. It is for this reason that leases are much more difficult, and more costly, than loans to end early. Breaking a car lease can be very expensive.

The reason that a car lease is so expensive to end early is that the lease company has the right (it's in the contract) to recalculate everything, including the car's value and the amount remaining to be paid. The method used is not customer-friendly. It's explained in the fine print of the lease contract, but is almost impossible to understand.

Most customers are surprised at the high cost of an early lease termination. Other than the method used (discussed above), there are two other reasons a termination is expensive.

First, lease payments are "even" every month, in terms of the amount applied to the cost of the car and the amount applied to interest (finance charges). The amount applied to the cost of the car doesn't keep up with un-flat rate that a car depreciates in value. Lease payments don't keep up with the rapid rate of depreciation until very near end of lease. Therefore, the amount owed on a lease will nearly alway exceed the value of the vehicle, until very near lease-end.

Second, the amount owed for an early termination is based, in part, on selling the car at a wholesale car auction. Sale price is subtracted from amount owed. Since the sale price can be very low at such an auction, it won't reduce amount owed by as much as might be expected.

What to do?

Make sure you understand the numbers. Call your lease company and get your early termination payoff amount.

Try to find a way to complete your lease. Work out payment plans with your lease company. It is the easiest, cheapest, and least damaging way.

Try to find someone to take over your lease. Some lease companies allow it, others do not. Try a company like Swapalease.com who matches lease "sellers" with "buyers."

Avoid a repossession at any cost. Even voluntarily returning your car and stopping payments without paying early termination charges will damage your credit for 7 years, and you'll still be sued for the amount you owe.

Misunderstandings About Getting Out of Car Lease

Many people who lease cars don't really understand leasing and how it works, including how to get out early.

First, leasing is not renting, as many people think. You can't simply return your car before lease-end. A lease is designed to be completed, and is a legal contract to do so.

A car lease is a form of financing like a loan. From the beginning to the end, there is a balance remaining each month. However, unlike with a loan, there is no way the leasing customer can know exactly how much is owed without contacting the lease company. It is not simply the sum of remaining payments, as many people believe.

Getting out of a car lease is not simply returning the car and paying a small "penalty." Although some lease companies do charge a penalty, the more significant cost is the account balance, after subtracting the car's auction sale price. This amount, for most people, will be thousands of dollars.

You can't end your lease by sub-leasing to someone else -- someone who will take your car and make payments. To do so violates your lease agreement and puts you at risk. However, with your lease company's permission, you might be able to "transfer" (not sub-lease) your lease to another party. Some lease companies allow it, some do not. You should contact your lease company to find out.

It is usually not practical to try to trade a leased car, say, for a less expensive car. Since most leases are "upside down" there is no trade equity. It would be unwise and financially impractical in most cases to add the negative equity to the price of another car. Even if you were allowed, the large amount of negative equity would make your new car much more expensive, and you would be even more upside down.