What is lease purchase?

Low monthly instalments with a large final payment: the complete guide to financing a car or van with lease purchase

BuyaCar team
Nov 9, 2016

Lease Purchase, otherwise abbreviated to LP, is becoming an ever-more popular way of buying vehicles - especially vans. It involves paying a deposit, monthly instalments, plus a large mandatory payment at the end.

However, the monthly payments are usually lower than with PCP (Personal Contract Purchase) and HP (Hire Purchase).

Our buying a car on finance guide will tell you about other ways of financing a vehicle. 

LP: Good for

✔ Low monthly payments
✔ Owning a vehicle at the end
✔ Avoiding penalties for damage and exceeding mileage allowance

LP: Not so good for

✘ Flexibility
Steady repayments: you have to pay a lump sum at the end
✘ Regularly changing your vehicle

     

How does lease purchase work?

A lease purchase agreement spreads the cost of buying a vehicle into three sets of payments:

1) The first is a deposit that you pay before you get the car or van. This is often around 10%, but can be up to 50%. The more you pay now, the lower your monthly payments will be.

2) The second set of payments are your monthly instalments, which typically run for between two and four years. These are lower than some types of car finance, such as a bank loan or Hire Purchase (HP), because they only cover part of the cost of the car. Monthly payments may be a little lower than Personal Contract Purchase (PCP) finance because lenders charge slightly less interest.

3) At the end of the agreement you have the third type of payment to make: the final instalment, which is often called the balloon payment. This is usually several thousands of pounds and has to be paid - you can’t just hand the car back. However, there’s usually the option of extending the lease agreement by making additional monthly payments or refinancing the vehicle to cover the balloon payment, if you are unable or unwilling to pay the lump sum.

     

Lease purchase (LP finance): the alternatives

See how lease purchase compares to more flexible forms of finance, and those which don’t require a large final payment

      

Lease Purchase (LP finance) vs Personal Contract Purchase (PCP finance)

Just like lease purchase agreements, PCP deals are split into three sets of payments, starting with the depsoit (although there’s often a no-deposit option) and then monthly instalments, which are low because they only cover part of the cost of the car.

The agreements differ once all of the monthly payments have been made. PCP allows you to hand the car back; there may be the option to trade it in for another vehicle; or you can make the final payment to own the car.

With a lease purchase agreement, buying the car is mandatory, although there is usually the option to extend the lease or refinance the vehicle.

The monthly payments for lease purchase finance may be a little cheaper because interest rates are often slightly lower; PCP lenders have to take into account the risk of cars being worth less than expected when they are handed back.

   

Lease Purchase (LP finance) vs Hire Purchase (HP finance)

Both of these agreements end with you owning the vehicle, but HP spreads the cost into a series of identical monthly payments. Once they are finished, then the vehicle is yours - there’s no large lump sum that needs to be paid, unlike with lease purchase.

     

Lease Purchase (LP finance) vs Car leasing / Personal Contract Hire (PCH finance)

Car leasing, or Personal Contract Hire, is simply a long-term form of car hire. You pay an advance payment, and then a series of identical monthly payments. At the end, you hand the car back without the need to find any additional money. There's no option to own the vehicle.

Taking out a lease purchase agreement

Before the lease purchase agreement The payments on lease purchase agreements are based on the amount of deposit that you put down and the estimated value of the vehicle at the end of the agreement, as well as the interest rate you’re offered. You pay interest on everything that you owe - including the final payment.

Before you take out finance, you need to agree your average annual mileage and the amount of time that the agreement will run for. The finance company then estimates what the vehicle will be worth at the end. This will be the value of the final payment.

Your deposit and monthly instalments cover the difference between the price of the vehicle that you’re buying and its value at the end of the agreement. The bigger the deposit that you pay, the lower your monthly instalments will be.

During the lease purchase agreement You don’t own the car until you have made the final payment, so it’s not possible to modify it (such as fitting new wheels or upgrading its performance) without permission from the vehicle’s owner - the finance company.

At the end of the lease purchase agreement You must make the final payment, which is usually thousands of pounds - if not more than £10,000. You’ll then own the car. It doesn’t matter how much the car is really worth, or if it has gone over the mileage limit: you are liable for the final payment that was agreed at the beginning.

It’s usually possible to refinance the car to cover the payment, but there’s no cast-iron guarantee that this will raise the money required. You may also be able to extend the lease purchase agreement and make another year’s-worth of monthly payments, for example.

       

Can I end a lease purchase agreement early?

You can settle the agreement early, but you’ll need to ask your finance company for a settlement fee - the amount that you still have to pay. This is likely to include penalty charges to cover some of the interest that you would have paid if you had continued to the end.

If you miss a payment, then the vehicle can be seized and sold to cover the amount of money that’s owed. If it sells for less than your debt, then you’ll be responsible for making up the difference, including court costs.

There’s also the option of voluntarily terminating the agreement and returning the vehicle, although this is usually an expensive option that leaves you with nothing to show for your payments.

If you have already paid half of the total amount due under the agreement (including the final payment and interest), then you’ll owe nothing more. However, if you’ve paid less than this, then you’ll owe a one-off amount to make your payments up to half of the value of the lease purchase agreement.

      

Lease purchase cars

It’s unlikely that lease purchase will be the only option available to finance the vehicle that you’re looking for. Most new cars are sold on PCP finance, which is also available for many used cars. HP finance is available for almost any car on the market.

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