Lease Purchase (LP)
Lease purchase is a form of conditional sale agreement, which means that the regular payments are similar to a lease/rental agreement but you will own the car at the end of the deal. You may be asked to pay a number of monthly payments at the start of your agreement (referred to as ‘advance payments’ and the leasing equivalent of a deposit) and a sum is usually deferred to the end of the deal. The deferred sum will be determined by the age and mileage of the car at the end of the agreement. The difference between a lease purchase and a PCP agreement is that the deferred sum (referred to as a Guaranteed Minimum Future Value (GMFV) in a PCP deal) must be paid on a lease purchase agreement. On a PCP, it’s optional.
At the beginning of the agreement
You may be asked to put down advance payments (essentially a deposit) against the car and you will then make monthly payments for the duration of your agreement. The deferred payment that must be paid at the end of the agreement is what the car will be worth at that point in time, taking into consideration your anticipated mileage, the age of the car and the length of the agreement.
This deferred figure is based on the estimated future resale value of the car. Consequently, the more the car ‘holds its value’, the more affordable the lease purchase agreement becomes. Premium or luxury cars are therefore often more likely to be financed by a lease purchase agreement.
At the end of the agreement
There is no option to return the car at this point so the deferred sum has to be made. This may be done through a cash payment or alternatively via a second finance agreement. A typical lease purchase agreement will last between two and four years. It is possible to fully or partially settle the outstanding finance at any point by contacting your finance company.
Advantages of lease purchase
- Lower monthly repayments because advance payments (deposit) are generally paid at the beginning of the agreement and a balloon payment is deferred until the end.
- Lower monthly repayments may help you to afford a higher specification car.
- The deferred balloon payment helps you to save money to pay off the car at the end of the agreement.
- You choose the length of the finance agreement.
Things to remember
- There is no return option at the end of the agreement.
- You must have sufficient funds (or apply for a second finance agreement) to pay off the deferred sum.
- Depending on current market conditions, the value of the outstanding balloon payment may be higher than the actual market value of the car.