What is Lease Purchase?

Lease Purchase, or LP, is one of the most affordable ways you can finance a car as it is available for used vehicles and comes with low monthly payments.

These instalments only cover part of a vehicle's cost and the rest is deferred to a final, mandatory payment that must be made at the end of the agreement. Pay this and at that point, you'll own the vehicle.

It's generally a cheaper option than Hire Purchase (HP), and can be more flexible than Personal Contract Purchase (PCP), as the monthly instalments and final payment can be widely adjusted.

There are currently 67910 cars available for sale on BuyaCar, with Lease Purchase finance arrangements starting from £111.65 per month

How does Lease Purchase work?

A Lease Purchase agreement spreads the cost of buying a vehicle into three sets of payments:

1. Deposit 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. Monthly instalments typically run for between two and four years. These are lower than some types of car finance, such as a bank loan or HP, because they only cover part of the cost of the car. Monthly payments may be a little lower than PCP finance because lenders charge slightly less interest.

3. Final instalment, which is often called the balloon payment is usually several thousand pounds and has to be paid - you can’t just hand the car back such as with a PCP deal. However, there’s usually the option of extending the lease agreement by making additional monthly payments or refinancing the vehicle.

How is Lease Purchase different from PCP?

Lease Purchase and PCP finance 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.

How does Lease Purchase differ from HP?

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

How is Lease Purchase different from leasing?

Leasing, also know as Personal Contract Hire, is simply a long-term form of vehicle 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

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 the Lease Purchase agreement

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

In theory, your deposit and monthly instalments cover the difference between the price of the vehicle you’re buying and its value at the end of the agreement. The bigger the deposit, the lower your monthly instalments.

However, because you're committing to buy the vehicle at the end and pay the full cost of the car (plus interest), many lenders are happy to increase or decrease the balloon payment.

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 a Lease Purchase agreement

You must make the final payment, which is usually thousands of pounds. You’ll then own the vehicle. 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.       

Can I end a Lease Purchase early?

You can settle a Lease Purchase agreement early, but you’ll need to ask your finance company for a settlement fee. 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.

You'll usually be able to sell the vehicle, with the agreement of your lender, to cover the settlement fee. If the vehicle's not worth enough, then you'll need to make up the difference. 

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.

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Other car finance options

Hire Purchase is likely to be more expensive. This is because the monthly payments are larger, meaning you're paying off the borrowing faster, reducing the cost of interest. With Hire Purchase, you own the car at the end, so if you plan to sell it in the near future, you’ll get less back for it if it suddenly loses value. 

PCP is the most common form of car finance and unlike Lease Purchase, gives you the option to buy the car at the end or hand it back, although many people will trade in for a new model. Monthly PCP payments are usually higher, like for like, than Lease Purchase.