Lease Purchase (LP)

What is Lease Purchase?

If you’re looking to purchase a vehicle with more affordable, lower monthly repayments over a 2 to 4-year period, Lease Purchase (LP) might be for you. This conditional sale agreement has some similarities with Lease/Rental, and Personal Contract Purchase (PCP) agreements, with differences such as:

• Any payments made at the start of the LP are known as ‘advance payments’ rather than a deposit – these help to reduce the monthly payments;
• There are no ties to a mileage contract and you avoid potential damage costs, unlike with Lease or PCP agreements
• The LP balloon/guaranteed minimum future value payment, must be paid, as there is an expectation of ownership at the end of the agreement, rather than with Lease/Rental, where you never own, and with PCP, buying is optional. This balloon payment is based on the age and mileage of the vehicle at the end of the agreement, and can be paid by cash or through a second finance agreement;
• There is no option to return the vehicle at any point during LP agreement
• There is no ‘option to purchase’ fee like there is in PCP

As the deferred figure is based on the vehicle’s estimated future resale value, the vehicle holds its value, thereby making the LP agreement more affordable, and more likely that you’ll be able to achieve financing of a premium or luxury vehicle.

How does Lease Purchase work?

Following any advanced payments against the vehicle, and similar to other agreements, you’ll make monthly payments until the end of the contract, and you can partially or fully settle the outstanding finance at any point. At the end of the agreement, you choose whether to: pay, or refinance the balloon payment. You can also part-exchange the vehicle if the trade in value offered is above the amount owed on your balloon payment, in order to obtain a deposit for your new vehicle. Alternatively, you can choose to sell the vehicle privately, but only once the final balloon payment has been paid, and the legal title of the vehicle has been transferred to you by the financer.

What are the advantages of Lease Purchase?

• Lower monthly repayments from choosing the length of the agreement, making advanced payments (deposit) at the beginning, and paying a deferred balloon payment at the end of the agreement
• You could afford a higher specification vehicle thanks to the lower monthly repayments
• You could save money to pay off the vehicle at the end of the agreement, thanks to the balloon payment
• You aren’t subjected to potential additional costs, like for mileage and damage

Remember:

• You cannot return the vehicle at the end of the agreement
• Your vehicle can be repossessed if you don’t keep up with payments - It is your responsibility to ensure you have sufficient funds to pay off the (deferred) balloon payment, or apply for a second finance agreement to finish paying it
• Depending on current market conditions, the balloon payment could be higher than the market value of the car