Most people think leases are weird, and are generally nervous about them. “No thanks, I like to just buy and own my car.” But a lease often makes sense for EVs, and this page will explain why.
Farther down is a discussion of what a “lease takeover” is and why you might want to do that, and related steps and concerns.
What is a lease?
A lease is basically a long-term rental of a brand new car. The financing company (a bank, or the finance arm of the carmaker) buys the car from the dealer, and then turns around and rents it back out to you, all in one big contract. What’s actually happening is that you are paying for the depreciation of the car over the period that you are leasing it. They take the car’s brand new value (e.g. an MSRP of $35,000) and the expected “residual” value of the car after the lease period (e.g. $20,000 after 3 years), and the difference is the depreciation over that period (in this example, that would be $15,000). They then take that depreciation and split it over the period (e.g. $15,000 over 3 years or 36 months) to come up with your monthly payment (in this example, $15,000 / 36 = $416.66). Normally there is interest (e.g. 3%) and state taxes (e.g. Georgia’s TAVT) to add in there, which raises that monthly payment a bit. But you can also make a “capital reduction” payment up front, similar to a down payment, to bring that monthly payment back down.
At the end of the lease, you just return the car, no strings attached. You don’t have to find a buyer for it, and you don’t care how much the car is actually worth. The “residual” value risk was taken on by the car company, on the day you signed the lease contract with them. Of course, you weren’t building equity in the car either; you’re just renting the car, so you never owned anything. You basically paid a monthly fee to drive around in a new car that you didn’t own.
Why are leases popular for EVs?
Historically, leases have been generally been used by the wealthier car buyer who likes to always be driving a relatively new car, and who frequently upgrades their car. If they’re planning on getting a new car every three years anyway, a lease means they don’t have to worry about trying to sell a car every three years. Further, being in a new car every three years means that they are always driving a car that’s covered under warranty, and possibly further covered under a free maintenance plan, so dealer visits cost nothing other than time.
Leases represent about 30% of the new car market. However, they represent 80% of the EV market? Why is that?
There are a few big reasons why leasing is so popular with EVs.
1. EV technology is improving rapidly, which is awesome, but it means that three years after you get your cool new EV, you may find yourself wishing you could get into the newest model. Every year, new EVs come out with longer range, faster charging, and often lower prices. EVs are relatively new technology, and are improving much more quickly than regular cars. After three years you’ll probably find that the new cars are noticeably better than what you’re driving now, so much so that you’ll likely regret being “stuck” with the EV you bought (instead of leased).
2. As a result, a three year old EV is hard to sell on the used market. If you bought your EV instead of leasing, you’ll find that the value of your used EV is a lot lower than you might expect, and you’re losing your shirt on the sale. By leasing, you let the financing company eat that risk, because the residual value is written into the lease contract on the day you got the new car. Actually, what’s really going on is that the leasing companies are often artificially raising the residual higher than what they actually think they’ll be able to sell the three-year-old car for, and that bump in residual may actually be funded behind the scenes by the carmaker. When you lease, you are taking advantage of that behind the scenes funding.
3. A federal tax credit of up to $7500 goes to whoever buys a new EV. When you lease a car, you are not buying it, but the financing company is. The financing company gets to claim that $7500 tax credit, and typically they will pass that credit on to you in the form of a lower monthly payment. On the lease contract there will literally be a line item for “capital reduction” of $7500, and that flows into their calculation, resulting in a lower monthly payment. For a three year lease, that’s a $208.33 monthly reduction, which for most cars makes for a huge drop in the monthly payment.
Wait, so how do I file for the $7500 federal tax credit when leasing an EV?
You don’t! You didn’t buy the car, rather you leased it, and you don’t file anything with the IRS. You got the benefit of the tax credit when the financing company lowered your monthly payment.
Because you don’t have to file for the tax credit, this means that leasing of EVs is particularly attractive to people who have low incomes, such as college students and retirees. They typically don’t have $7500 of federal liability in a single year (the “total tax” line on your 1040 IRS form, not the “amount you owe” line!) to even be able to claim the whole tax credit. But by leasing, they effectively do get the tax credit, just via the lower monthly payment, spread over the lease period.
This is a perverse reversal of the typical leasing customer, who is often a high income earner. Leases allow people with lower incomes to benefit from the tax credit, just indirectly via the lower monthly payment.
Watch out — some carmakers don’t pass through the federal tax credit!
Most carmakers (financing companies, actually) will pass that $7500 federal tax credit straight through to you, as described above. However, some of them do not, keeping some or all of the $7500 for themselves! We don’t really know why this is — it may have to do with corporate tax burden, or tax law, or the other carmakers are actually subsidizing the credit to you, or who knows what. But it does mean that you need to pay attention when reviewing the leasing paperwork to make sure that $7500 show up on it. Typically it shows up on their spreadsheet / printout as a “capital reduction”.
turning in the car at the end of the lease
At the end of any lease, the car will be inspected, typically about a month ahead of time and by a mobile company like AutoVIN that specializes in this. They expect you to return the car in very good condition. Each lessor has its own rules about what normal wear and tear is, but typically they will allow small scratches up to a certain size, minor wear on the upholstery, etc.
After the inspection, the actual return of the car can usually be done at ANY dealer, although obviously it needs to happen on or before the last day of the lease. Be aware that some dealers will refuse to accept a lease return, because it counts against a quota for them. Call ahead and make an appointment for that return day.
The lessor will charge you a fee at the end of the lease, a lease termination fee, which can be $600 or higher.
Lease return damage insurance
You can choose to get an insurance policy for any damage found on the car during the inspection at the end of the lease. If doing a lease takeover, make sure that’s transferable.
DOING A LEASE TAKEOVER
What is a lease takeover?
A lease takeover is where you take over someone else’s lease, in the middle of the lease term, and the lease is literally transferred to you within the financing company’s system, via some paperwork and fees.
A lease takeover is great for you if you only need a car for a short period for some reason (e.g. 12-20 months), and don’t want to take the risk of buying a car outright and then having to sell it, or sign up for a 2- or 3-year lease. Or maybe the regular new lease deals are outrageously expensive. With a lease takeover, you’re still getting an almost new car, it’s still under warranty, and it’s still an official lease so at the end of the lease period you can just give it back and walk away (or buy it out if you so choose).
The person who is giving up the lease will have their own personal reasons for wanting to get out of the lease — maybe their financial situation changed and they can’t afford it anymore, or they are leaving the country, or whatever. Doing a lease takeover lets one person unload an unwanted car to someone who does want it.
A lease takeover can also be a bargain because you are only taking over the monthly payments. The original lessee already paid the down payment, and usually doesn’t expect you to give him back any of that.
How do you find the car?
You need to find someone who has a car under lease that they are trying to unload. Similar to person-to-person selling sites like eBay and Craigslist, there are two competing internet clearinghouses for lease takeovers: LeaseTrader and Swap-A-Lease.
LeaseTrader / www.leasetrader.com
– monthly fee, 90 day without auto-renew
– transfers are handled within LeaseTrader, with their escrow
– LeaseTrader is involved in the transaction all the way through
Swap-A-Lease / www.swapalease.com
– one time fee
– you get in touch with other party and execute the trade yourself
– after that contact, Swap-A-Lease is completely uninvolved with the transaction
LeaseTrader (LT) and Swap-A-Lease (SAL) are the two sites where people list their cars, that they are trying to get rid of, and you peruse the listings looking for what you want. Both sites are free to VIEW but cost money to actually execute a takeover. LeaseTrader has a monthly fee (3 months = $50) and then you can contact the seller and execute the takeover with LT involved, using their escrow service. Swap-A-Lease has a one-time fee ($50) and then you can contact the seller and do everything yourself (no further involvement by SAL). In my recent experience, SAL was simpler process (they let me get in touch with the seller and then got out of the way) and they had a slightly better selection of cars in their listings. However, since there’s no escrow, one or both of the parties are at some risk.
I found a car to do a lease takeover on, but it’s really far away. How do I get it to me?
There are car transport companies that do this all day long. Typically you will deal with a broker, and they will farm out the job to an independent trucker. A cross-country job costs around $1000, obviously less for shorter routes.
The broker will take your details and post the job on a board where truckers can pick up the job if it fits a route they are putting together (with other cars). So nothing is certain until a specific driver has accepted your specific job, and has accepted the price. So don’t pay the broker anything before the driver is set. The broker will get a cut of the job, as their fee, so what you are paying doesn’t all go to the trucker. Some brokers may low-ball their initial quote, but remember all they get is their fee. If they list your job and then no driver is willing to move your car for that price, then that turned out to be a meaningless quote. Consider asking the broker what their fee is, and getting them to post your job at the middle of the price range instead of the bottom, so that you get a better trucker.
How exactly does the paperwork get done?
The old lessee and the new lessee (you) will work with the lessor (the financing company) to move the obligation over to you. Literally all they are doing is changing the name on the paperwork; everything else, including the payment and return date, stays the same. The lessor will charge you a lease transfer fee, which will be anywhere from $75 (Ford)to $500 (BMW) and even higher.
The financing company ultimately is handling the takeover, and they will have a clear process for how to do this. My personal experiences with this have been with BMW (BMW Financial Services), and they were fantastic. Apparently they do this a lot, and the process could not have been smoother (and I certainly love to pick out process flaws).
Picking a lease-takeover car is like buying a used car
Because you are getting a very specific car, not a new model that you can pick options on, doing a lease takeover is like getting used car, in that you need to educate yourself on exactly what options were available, in what model year, so that you can properly evaluate a particular car listing. A given LeaseTrader / Swap-A-Lease listing may not say what options are installed, but with enough pictures you can usually figure it out.
I have several model-specific pages on this website (see links on right side) that describe differences between model years, option availability, etc. This is especially true of the BMW i3 page, where I have a lot of that detail, including options codes and links to VIN decoders.
Other lease takeover concerns including cash incentives
Often the existing owner will offer an incentive — cash to defray the cost and attract you to their car. Older EV leases are often overpriced (EV technology improves, devaluing the old cars) so they have to put some cash on the table for you. So feel free to ask them for that, if they haven’t already stated it up front in the listing.
If you are doing a lease takeover, you are taking responsibility for the condition of the car, so find out what condition the car is in before you take it. Scrutinize the photos, and ask for more photos if some areas aren’t shown.
Similarly, some lessors (financial companies) require a security deposit, which you will theoretically get back when you return the car. If you are doing a lease takeover, the original lessee may ask for his security deposit back from you, during the takeover process, because you are later going to get that deposit back from the financing company at the end of the lease.
Ask the existing owner to NOT drive the car during the time the transfer is in process.
Why NOT to do a lease takeover
Just like when you buy a used car, when you take over someone else’s lease, you are at risk of inheriting someone else’s problems (e.g. car damage) that YOU will then be responsible for fixing before lease end. So inspect the car for visible damage as closely as you reasonably can.
Every state handles the auto tax differently. In some states, the tax is paid only at the beginning of a lease, so you’d pay no additional state taxes during a lease takeover.
In Georgia, car taxes are primarily assessed via something called a Title Ad Valorem Tax or TAVT. The TAVT tax is charged whenever the title changes, so it is only assessed once during your ownership of the car, at the very beginning. The amount is typically 7% of the current value of the car, which is easily $2000-$3000 on a late model BMW i3. Now, in a lease, you don’t own the car, rather the financing company does (e.g. BMW Financial Services), but you are still responsible for the TAVT, paid when you go into your county tax office to register the car. In a lease swap, even though the lease is changing lessees, the “owner” hasn’t actually changed, but the TAVT may still be charged against you. If the swapped car is coming in from out of state, then that definitely means the title is changing (because it needs to get retitled in Georgia) so you’re going to have to pay the TAVT. If the swapped car came from inside the state, then the title doesn’t change, and then you will not have to pay TAVT. If you are registering a car after an in-state swap, in our experience the county offices understand this and you won’t even need to bring it up. But if they do try to assess TAVT, stand your ground and insist that the TAVT should not be assessed for the reasons explained above. If they still don’t budge, consider leaving and coming back another day, when there may be different management on duty or they may have since studied the question and understand it better. TAVT should only be assessed if the car is retitled. Whether you have to pay TAVT or not can make a huge difference in the affordability of the whole lease takeover transaction!