I know that if you roll the fee into the lease, you pay finance charges on it, but you dont if you pay upfront. Given the low rates most of us are paying, rolling it in seems like a low cost away to buy insurance against losing all of that money if the car is totalled, stolen, etc.
However, can anyone advise on the tax treatment on the acquisition fee here in calif? (My sales tax rate is 9.75%, so I am always thinking about tax).
Is the acquisition fee taxed if paid upfront?
Is it taxed when rolled into the payment?
If it is only taxed when rolled into the payment, then one is paying 9.75% of the fee as to mitigate the risk of the loss of said fee in the car totalled/stolen scenario (and to pay less now, which also has some value).
In the end, this only a <100 dollar question. But its fun to optimize, which is the point of this forum I suppose.
most people usually only look at complete final cost. On alot of 24 month leases it ends up being cheaper to take money factor hit vs waiving it. On 36 or longer it doesnt. Depends on the structure of the deal
Just roll it in, you’re talking a couple bucks difference. Maybe $125 over the term. But if you crash it and it’s totaled, you’re out whatever you put down.
I understand the tradeoff of paying interest on the acquisition fee vs paying it upfront. But those dollar tradeoffs are quite a bit less than the tax vs not taxed tradeoff I asked about, at least in calif at the MF I am going to be paying.
Tax is only on the price of the car. I always roll everything into my leases, just did my third in CA. I had one lease lemon at 12 months so I only paid 7.75% on 1/3 of acquisition fee (since it’s amortized).
To Joe’s point: if you pay it to save on taxes and it’s totaled, you lose. Leasing is not just the smallest payment or the least taxes, it’s also about shifting 100% of the risk to the lender and only paying for what you use when you need it. #riskmanagement
Actually, I’d argue the point it to get the best combination of risk and benefit for one’s individual risk threshold. Placing 100% of the risk on the lender isn’t free in this instance. If I lived in a no sales tax state, then sure it’s the no brainer you make it out to be.
I am ok with risking 1000 in acquisition fee to save 97.50 dollars in tax on it. I don’t think there is a 10% risk of loss, no way are 10% of car totalled or lemoned in the first 3 years.
I dont think its worth it for me to buy “insurance” (which is what rolling it into the payment is) against 1000 dollar losses. If you do, then that’s your choice. . Do you buy the extended warranty on your TV too?, because that’s quite analogous to this situation.
BTW, risk management =/ risk minimization, because shifting risk is rarely free.
I was thinking today about the lease vs buy decision and these two fees, which are ~1000-1300 in total for BMW/MBZ etc.
If I buy a new car and then trade it into the dealer 3 years later, I dont pay this 1000-1300 bucks. So why I am I paying it when I lease? I dont think leases require any more work/labor on part of finance company. In both cases, the paperwork is similar . Both loan and lease docs have to be processed by financial company and loan/lease has to be serviced over the term).
What I am paying ~1200 bucks for when I lease is the option to either buy the car at a fixed price or walk away at the end of the term. Or to make the comparison to buying more direct, when I lease, I get the right to “sell” the car back to the dealer at a predetermined price. If I lease a Suburban and then war between Iran and Saudi Arabia raises gas prices to 6.50 a gallon - well too bad for the finance co. I am giving that car back having paid up til then as if its current value is 38k, while its market value is 28k. GM Finance loses. If I had bought the car, then I take this 10K loss. Or if I have 3 accidents that show up on Carfax, the finance company eats the loss when I turn it in.
Its the guaranteed value at the end of the term that is risky for the finance company. We are paying them for taking that it with our acquisition and disposal fees.
Lots of factors drive the desire to lease over buy:
tax advantages are a factor in many states/situations
desire to have more car at same payment
avoiding “tying up” capital.
All valid reasons, but those don’t require a fixed trade in value at the end of the 3 years and they don’t really cost the finance company anything.
For me, the price certainty is not worth the cost. If I couldn’t save about 3-4k in sales taxes here in my 9.75% jurisdiction, I wouldn’t lease. But I can, so I do,.
But I wish I could still do an open ended lease, assuming that the ~$1200 fees paid as premium for the finance company would go away. I would take on the risk to save 1200 bucks.
I’m confused. The acquisition fee is administrative costs of setting up a lease. The disposition fee covers costs for cleaning and reconditioning to resell it. Doesn’t the finance company set the residual value to manage their risk?
There is also consideration of cost to borrow (it’s amortized in the lease which means you pay rent on it), which is another reason to pay attention to the money factor.
There is also consideration of time cost of money: what’s the opportunity cost of paying the fee up front vs putting it to work elsewhere? I have a couple 3.3 and 3.5% CDs, my MF is 0.74%
In this case the statistical averages don’t matter, your risk is an N of 1. On 7 leases I had 2 successful lemons, 1 unsuccessful, and 2 accidents (neither totaled but neither I’d want to buy out, or had I purchased I’d suffer diminished value if I couldn’t recover from insurance).
Right. In exchange you own the car, the drive-off depreciation, any expenses once it’s out of warranty. Your TCO model has to include the accurate likelihood of how long you will keep it, the carrying cost (purchase interest rate was 2 points higher for me than leasing). The odds of a lemon/total in 3 years may be what you guessed, but ask an experienced manager at a dealership what % trade earlier than expected or roll negative equity, it’s much much higher than 10%.
Leasing isn’t right for everyone, but it’s not wrong, and I think you’re thrashing back and forth because you’re conflating arguments. Buy if you want, nobody’s forcing you to pay an inception/disposition fee or get something new every 2-3 years.
