A Complete Guide to Lease Purchase
What is lease purchase?
What do you do when you want to own a car at the end of your agreement but also keep your monthly payments low?
Let us introduce you to lease purchase.
Lease purchase occupies a middle ground between hire purchase (HP) and leasing. With this type of car finance agreement, you’ll work towards owning the car at the end of your payment period but the amount you pay each month will typically be lower than it would with a standard HP agreement.
It’s also sometimes known as a hire purchase with balloon, as you’ll typically pay a final balloon payment at the end of your agreement to become the car’s legal owner.
How does lease purchase work?
With a lease purchase, you’ll pay a monthly amount – including interest – for anything up to five years. You’ll then have to pay a final larger balloon payment to purchase the car at the end of your agreement.
You might also be charged an arrangement fee. This sometimes has to be paid at the start of your agreement or will be spread across your monthly payments.
It’s unlikely that you’ll be restricted on the number of miles you can drive during the agreement but there still might be a few rules to follow. And as with many other forms of car finance, you may find that you can’t hop across the Channel in your car or use it for business during your agreement. It’ll have to be fully insured too and kept in a roadworthy condition, so try not to inflict any damage beyond minor bumps and scrapes.
What happens at the end of your lease purchase agreement?
Unlike a PCP agreement, at the end of your lease purchase contract, you must pay the balloon payment and buy the car. You won’t be able to simply hand the car back or use the equity as a deposit in a new finance agreement. And if it’s based on an HP contract, you might have to pay an additional ‘option to purchase’ fee too.
Your balloon payment will likely be based on your GMFV – the Guaranteed Minimum Future Value of your car – and you may wish to secure additional finance to help cover it.
Why choose lease purchase?
Still wondering whether the lease purchase option could be right for you? Check out the pros and cons to help you make your decision.
Pros
Monthly payments are typically lower than they would be with HP
When you finish all your payments, you will own the car outright
You’re unlikely to have any mileage restrictions to worry about
Cons
You will have to pay a balloon payment at the end of your agreement to complete your purchase
You may need to look for additional finance to cover the balloon payment
Unlike PCP, you cannot simply return the car or use the positive equity as a deposit in a new agreement
Alternative car finance options to lease purchase
Personal Contract Purchase (PCP)
If you’re looking for an alternative finance option, Personal Contract Purchase (PCP) could work for you. You might pay a deposit, followed by monthly payments for a certain length of time but, at the end of your agreement, you can choose to buy the car, return it, or trade it in for a new one. Terms and conditions will apply – you’ll need to agree to a set mileage and not damage the car to avoid extra charges. You can find out more about PCP here.
HP (Hire Purchase)
With Hire Purchase (HP), your loan is secured against the car you’re buying and it won’t belong to you until your final payment. You might need to pay a non-refundable deposit and then repay the rest in instalments, plus interest, for anything from 12 months to 5 years. You can find out more about HP here.
Lease purchase Jargon busting
Balloon payment
This is the amount you’ll need to pay at the end of your agreement to own the car.
Positive equity
Positive equity is the difference between the value of your car and the amount you still have left to pay on your car finance agreement. If you owe more than the car is worth, you’ll be in negative equity.
GMFV
GMFV (Guaranteed Minimum Future Value) is the amount it is agreed your car will be valued at if you want to hand in your car or trade it in for a new PCP agreement. It depends on the number of miles your car has done, its condition, service, and maintenance record, and is based on the terms of your agreement, the anticipated mileage, and the vehicle type.
APR/interest
This is the amount/rate you’re being charged for borrowing money from a lender. APR stands for the Annual Percentage Rate and it includes any initial fees and compulsory charges as well as your interest.
The nuts and bolts of Lease Purchase…
Lease purchase allows you to lease a car for a period of time and then pay a final balloon payment to own it
Your monthly payments will typically be lower than they would be with HP and the balloon payment will be based on the GMFV
Unlike PCP, you won’t be able to return the car or use its positive equity as a deposit in a new agreement
You’re unlikely to have any mileage limits but you will have to keep the car in a roadworthy condition during your agreement