Lease Purchase

HOW DOES IT WORK?

Lease Purchase is structured in the same way as a Personal Contract Purchase(PCP) in that a capital lump sum amount, known in this instance as the Residual Value (RV), is deferred to the end of the agreement and this must be settled to gain outright ownership.

As with PCP, the RV is based on the type of vehicle and the suggested annual mileage covered by the vehicle. By deferring a lump sum to the end of the agreement, the RV reduces the regular monthly payments and makes more expensive vehicles far more affordable.

As a customer you will benefit from a slightly lower finance rate with a Lease Purchase product as, unlike PCP, there is no guarantee offered at the end of the agreement in terms of handing the vehicle back to the finance company. In other words, unlike PCP, Lease Purchase offers no option to walk away from the vehicle at the end of the contract.

It is your responsibility then to settle the final RV (or balloon payment) either though additional finance, cash or settlement by part-exchange.

"Put simply, Lease Purchase has a lower monthly payment than PCP, but you have to purchase the car at the end of the lease term"

Lease Purchase repayment periods are typically taken over 2, 3 or 4 years and settlement can be made at any stage of the agreement. Deposits for Lease Purchase are normally a minimum of around 10% and a maximum of 50% of the total vehicle price. Becuase the funder is exposed to less risk, customers will normally benefit from a slightly lower interest rate and there will be no fixed mileage contract.

WANT TO LOWER YOUR MONTHLY PAYMENT?

Within a Lease Purchase quote there are 3 things with which you can lower your monthly payment.

1. Consider financing the car over a longer contract period - perhaps a 48 month contract will make your car of choice more affordable.
2. The amount of deposit you are able to put down will dramatically effect your monthly payments. Higher deposit means lower payments
3. You can adjust the RV (the amount you pay at the end) by setting a higher or lower annual mileage and, because you are not contracted to a certain annual mileage, this can be set at any level depending on how large you want the RV to be. Any adjustment in the RV will effect you monthly payments. You need to be careful to avoid negative equity with a lease purchase agreement since a car's RV will considerably more if it has covered 10k miles a year rather than 30k.

Another way of putting this is that if you state your monthly mileage as being far lower than you actually travel, you'll end up paying more at the end of the contract - i.e the finance company will expect you to pay the balance on a car that has, as far as they are concerned done fewer miles than it's actually done. The risk is that you can end up paying more for the car at the end of the contract than it's actually worth.

GET AN LP QUOTE FOR A NEW CAR NOW

You can get an online LP quote for any new car directly from the details page for that new car. Simply click on the finance tab once you've found a car you're interested in, enter your details and click submit.

Author: Alex Davis
Date: 11th September 2008