A lease purchase (LP) or personal lease purchase (PLP) is a financial agreement which states that after the agreement you are obligated to take ownership of the vehicle outright.
A lease purchase is a simple product where it covers the cost of the vehicle and nothing else such as servicing and maintenance. However, it's the most popular finance product for those who seek ownership but want to spread the cost over a number of years.
The word lease can be confusing especially on a website about car leasing. However, the term is used because until the contract has been completed the driver is not in ownership and is effectively leasing it. The agreement is secured against the car.
The better the purchased vehicle holds its value (known as depreciation) the more attractive a lease-purchase becomes, therefore it's advisable to research the vehicle thoroughly to ensure you buy a vehicle that isn't just desirable now but will be desirable in years to come.
How are the lease-purchase costs calculated?
How much you'll end up paying for the vehicle over the life of the contract has many factors which should be considered before you sign the dotted line.
First of all, the retail price of the vehicle is taken into consideration along with the size of the deposit and how many miles a year the car will be driven. The interest rate offered is also a factor.
The value of the final payment is determined by how many miles are on the clock, and how much has already been paid off and of course what the car is worth at that time (equity).
The costs will be fully explained at the negotiations stage so you should have an exact idea of what life will be like paying for this car. Remember, with a lease-purchase you are obligated to pay the final payment which can be a significant amount if you drive a lot of miles and paid a small deposit.
Is lease-purchase right for you?
If you never want to own the vehicle and worry about the car's value depreciation then personal contract hire is the product for you. However, lease purchase is a convenient way to spread the cost of the vehicle's retail value over a number of years.
A considerable drawback of a lease-purchase is the very real prospect of paying for a car with negative equity - this means you are paying for a car that is worth less than that amount
Benefits of a lease purchase
Lease purchase offers many benefits to car buyers. The first being the ability to put down a large deposit for lower monthly payments and reduce the balloon payment. The second is the prospect of owning the car afterwards and having an asset free from finance.
Drawbacks of a lease purchase
A lease purchase can be more expensive than contract hire due to the total cost being significantly higher. Interest would also need to paid on top of the standard payments which goes straight to the funder. Ownerships of the vehicle is also a drawback if you simply don't want the vehicle anymore and can't afford the balloon payment. Then there's the issue of potential negative equity.
If you can't afford the balloon payment you may have to take out another financial agreement to pay for it.