What is Lease Purchase?
A lease purchase agreement is a type of lease contract where you own the vehicle outright, through making similar monthly payments as you would with any other type of leasing contract. It offers you the benefits of vehicle ownership whilst avoiding the immediate upfront fees, so if you have a regular monthly income, this could be the best way for you to attain a brand new vehicle. Lease purchase is especially beneficial for those wanting a luxury car, or would like to drive one which will hold its value over time.
At LeaseCar, we pride ourselves on being the UK's favourite car leasing website, and want to make sure everyone gets the best possible leasing deal for them. In this guide we'll be explaining a lease purchase car agreement, however, the type of contract works just the same as van lease purchase. You can rely on us here at LeaseCar for clear advice and great lease purchase deals.
What is Lease Purchase?
As mentioned above, a lease purchase is a type of leasing where you own the car when it comes to the end of your contract. It's very similar to personal contract purchase in this respect, as oppose to lease hire or finance leasing where you have to return the car at the end of your leasing agreement. If you want to own a car, but wish to avoid having to pay the high immediate costs associated with car ownership, then lease purchase could therefore be your best option for you.
Where it differs from personal contract purchase is significant and important to bear in mind when looking at the many different leasing options. With personal contract purchase, you are given the option to fund your final payments and receive ownership of the car, but can choose to re-lease, or just walk away at the end of the contract.
This is often the leasing option chosen by VAT registered companies and businesses, as you can offset the value against the businesses tax profits, and once the payments are complete the company can still use it as a company car or for business use.
With lease purchase, you enter into a contractual obligation to buy the car at the end of the agreement, and for this reason, its important you pick the right vehicle for you and your personal situation.
Lease purchase means that you get all the joys and benefits of car ownership, but will be making payments on a monthly basis usually for a time period of 2 - 4 years. You must be aware that when entering into a lease purchase you'll have to purchase the car you choose to lease, so be sure that you know how these contracts work.
How Does Lease Purchase Work?
Similar to other leasing contracts, especially those with the option to purchase the car at the end, the lease involves three main payments:
- Initial lump sum down-payment
- Monthly payments over the agreed period
- A balloon payment
Upon choosing a car, you'll pay an initial lump sum down-payment, which is generally the same amount as three months worth of contract payments, and then will begin to pay back on a monthly basis over that agreed period, before paying a final balloon payment. Should you be in a financially stronger position after taking the lease out, many companies allow you to buy the car within the duration of the lease contract.
The monthly payments are worked out by figuring out the retail value against the estimated future value for the end of the contract based upon the estimated depreciation. This is what is known as residual value, and is significant in defining how much you'll be paying back over the duration of the contract. This is why it's important to choose a car that won't depreciate in value significantly.
The more your leased car depreciates in value, the higher the residual value will be and therefore the higher monthly payments you will have to fund. For this reason, those considering lease purchase will often choose premium or luxury cars, as these hold their value much better than other cars on the market. Lease purchase can be an excellent choice therefore for those who are looking for a long term car that will hold its value, rather than those seeking short term car use.
When your contract comes to an end you'll have to make one final payment called a balloon payment, this is all decided before you sign up to an agreement, as with your agreed monthly payments, and it is the guaranteed minimum projected value of the car you're leasing by the end of the contract. The better value your car holds, the better deal you'll get at the end of your lease.
There are a number of advantages to a lease purchase for leasing your next vehicle, being able to actually 'own' the car you're driving, whilst paying manageable monthly fews is a very tempting offer for many who're without the immediate funds to own a new car.
If you're after a higher end car in its class, this too can benefit a lease purchase - as if it holds its value, you'll get a much better deal and be driving a car of a quality you may not be able to afford on your own.
Here's a list of some of the advantages:
- Ownership - after making the balloon payment, the car is yours to do whatever you want with. As you've already committed to purchasing the vehicle, lease companies will be less strict on usage, as ultimately you'll be paying for the potential depreciation.
- Allows High quality luxury leasing - a higher quality of car becomes a financial possibility, as the better value the car holds the lower your estimated monthly payments will be. This will afford you cars you may not have previously been able to buy.
- Lower repayments - lease purchase often has a lower rate of monthly payment than other lease contracts, making it even more affordable.
- Financial flexibility - with lease purchase you can own a car whilst holding money back for other things in your life. With an initial deposit usually worth 3 months payment, it is dramatically cheaper immediately than buying a car outright.
- Asset to your company - if you own a company and want to retain the car as an asset, this is a superb method to purchase your vehicle through, as the payments can easily be managed throughout the duration of the contract period.
- Against tax - if you run a company you can write down the value of the leased vehicle against your taxable profits within balance sheet data.
Whilst lease purchase has many advantages, it's not the right contract for everyone, and signing up to this lease is a big commitment to the purchase of your car. As a result of your ownership, you also take on much more responsibility than you would otherwise in leases such as contract hire.
Here's a list of the potential disadvantages:
- Ownership risks - upon owning the car, you'll have to pay for maintenance, repairs and will ultimately be paying for the vehicles depreciation should it lower dramatically.
- Can't recover VAT - Unless the vehicle is being used just for business use, a company cannot recover VAT. This means that using it as a company car for employees to use day to day would not be possible.
- Balloon payment - this is not an optional fee with lease purchase, and if your car has lost value over the course of a lease for whatever reason you could be paying more than the actual residual value.
- Costs that are often included in a lease, such as road fund license (also known as road tax) is not in the cost.
As you can see, there are a number of advantages and disadvantages to lease purchase agreements, they therefore suit many different people. If you know you want to own a car for a longer period of time but don't want to pay the high upfront fees, then lease purchase may be the option for you.
Most importantly, be sure to look for the best deal you can get, and be sure to carefully read any contracts you're given before signing up. Lease purchase agreements can be an excellence method of car buying, but if you choose a poor rate it can also prove costly.
At LeaseCar we have a large range of brand new cars and are more than happy to talk you through any leasing concerns you may have. If you're interested in lease purchase or have any questions about cars and leasing, please don't hesitate to contact us on 0344 745 1818or fill in our online form.
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