If you want to buy a vehicle outright, but don’t have the money to do so immediately then lease purchase could provide an affordable solution. Lease purchase is a method of financing a vehicle that is normally used by VAT registered companies or businesses, which works in a similar fashion to personal contract purchase (PCP) but with some fundamental differences. This guide to lease purchase will explain exactly how it works and how you can find the best lease purchase deals.
What is Lease Purchase?
Broadly speaking Lease Purchase is the same as PCP in that the leasing company has a retail value of the car and works out an estimated future value of the vehicle for the end of the contractual period based on its depreciation. This is known as the residual value. You can place a lump sum down-payment on the car upfront and then you make monthly payments on the difference between the retail value and the residual value. As a consequence, the more the vehicle ‘holds its value’, the better the deal – meaning luxury cars are often popular for lease purchase deals.
However, there is a fundamental difference between lease purchase and PCP. Whereas PCP gives you the option to buy the car outright at the end of the contractual period, with lease purchase you already have an agreement to buy the car. There is no return option.
Therefore at the end of the lease period, the customer must make a final balloon payment. This may be done through a cash payment or alternatively with additional finance or a part-exchange.
A typical lease purchase agreement will last from two-four years, though with most companies it is possible to settle the agreement at any point during this period.
You should think carefully before entering into a lease purchase agreement because it is not necessarily the right method of car finance for everyone. Here are its advantages:
- Luxury/prestige vehicles – Lease purchase is best suited to the finance of high-class vehicles due to the fact that you must take on the residual value. Higher residual values will also result in lower monthly payments.
- Company asset – Lease purchase is ideal for companies that want to retain the vehicle as an asset.
- Frees up finance – With lease purchase you take control of a vehicle while still holding money back to put into your company. Initial deposits are only usually the equivalent of three months’ payment.
- Lower monthly payments – Payments are typically cheaper than hire purchase.
- Balance sheet – The vehicle can appear as a balance sheet item and you can write down the value against taxable profits.
- Ownership – Once the balloon payment is made, the vehicle is yours.
There are disadvantages to lease purchase too, including:
- Road fund licence is not included as part of a Lease Purchase agreement.
- Balloon payment – You must have sufficient finance to afford the balloon payment at the end of the contractual period because it is not optional. In some cases it can be higher than the residual value.
- VAT not recoverable – You can only reclaim VAT if the car is used exclusively for business use.
- Ownership risk – The car is yours and thus the effects of depreciation and the costs of maintenance and disposal are all risks throughout the contract.
For businesses, lease purchase requires expert handling. The task of managing a fleet of lease purchase vehicles is not straightforward and you’ll need to scout the market thoroughly for the best deals. You can make it work for your business as long as you research thoroughly.