What is Lease Purchase?
Regular, low monthly instalments with one large final payment: how financing a van on Lease Purchase compares with other types of finance
Lease Purchase, or LP, is one of the most affordable ways you can pay for a van, as it is available for used vehicles and comes with low monthly payments.
These instalments only cover part of a van'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.
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 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 to cover the balloon payment, if you are unable or unwilling to pay the lump sum.
Lease Purchase: good for
✔ Affordable monthly payments
✔ Owning a vehicle at the end
✔ Avoiding damage and mileage penalties
Lease Purchase: not so good for
✘ Buying a personal car
✘ Steady repayments (large final payment)
✘ Regularly changing your vehicle
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)
Just like Lease Purchase agreements, PCP deals are split into three sets of payments, starting with the deposit (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 van 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) 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, which are generally higher than LP. Once they are finished, the vehicle is yours - there’s no large lump sum that needs to be paid, unlike with Lease Purchase.
Lease Purchase (LP) vs Leasing / Personal Contract Hire (PCH)
Leasing, or 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
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 on 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.
In theory, 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.
However, because you're committing to buy the vehicle at the end and pay the full cost of the van (plus interest), many lenders are happy to increase or decrease the balloon payment so that the monthly payments fit your budget.
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. 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, 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.
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. Negative equity finance may be available to spread the cost of this if you're looking to jump into a new vehicle.
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.