Lease Purchase Explained

What is Lease Purchase?

On a Lease Purchase (LP) an amount of the total cost of the vehicle will be deferred (estimated future resale value/ residual value) until the end of the agreement. Your monthly payments will be based on the total cost less the deferred amount. The deferred payment must be paid at the end of the agreement to own the vehicle.

On a LP agreement the deferred element (residual value/final payment) is estimated based on the vehicle usage, meaning the vehicle could be worth less than the lenders estimation which could result in negative equity.

The difference between a Lease Purchase and a Personal Contract Purchase PCP is that the deferred payment on a Lease Purchase is an estimate of how much the car maybe worth, where as on a PCP the Guaranteed Minimum Future value (GMFV) is the minimum the car will be worth and there is no option to return the car.

Summary

Initial Payment
You may be asked to pay an initial payment.
Fees
An arrangement fee charged by the lender that can be paid at the start of the agreement or spread over the monthly payments. There is an Option to Purchase fee at the end of the agreement if it is based on a Hire Purchase contract.
Restrictions
There are no mileage restrictions however lenders may impose certain restrictions on the use and location of the vehicle.
Ending the Agreement
At the end of the LP agreement you can:
Pay off or refinance the final payment:
Once all payments have been made, including the deferred payment and the Option to Purchase fee if applicable, the title to the vehicle will pass to you the customer.
Part exchange or sell:
If the dealer's part-exchange value is greater than the deferred payment, this can be used as a deposit towards your next finance agreement or received as 'cash-back'. Alternatively, you can sell the vehicle privately and settle the deferred payment. Note: There is no option to return the car.

Advantages of Lease Purchase

  • Lower monthly repayments because advance payments (initial payments) are generally paid at the beginning of the agreement and a final payment is deferred until the end.

Disadvantages of Lease Purchase

  • There is no return option at the end of the agreement.
  • You must have sufficient funds or be able to refinance the deferred value/final payment if you want to own the car.
  • Depending on current market conditions, the value of the outstanding final payment may be higher than the actual market value of the car.