What Is A Lease Purchase?

One of the many advantages of using a finance broker like Oracle Car Finance is that often we are able to offer a type of finance package or product that many people may not have considered or known it was an available option to them. Whether you are looking to lease through a business or as a personal car, a Lease Purchase can offer many benefits when compared to other financing options, as well as potentially saving you money too.

What Is A Lease Purchase?

A Lease Purchase is sometimes also called a ‘Hire Purchase with a Balloon’, and can potentially offer lower monthly payments than a traditional Hire Purchase arrangement thanks to the addition of a deferred final payment to the finance package. Whereas a traditional Hire Purchase spreads the total cost of the vehicle over the arranged term, minus any deposit, a Lease Purchase includes said balloon at the end of the agreement to reduce the monthly instalments over the term of the lease.

The amount of the deposit is flexible yet is typically between 10% and 50% of the price of the car, and the deferred balloon payment is calculated on the estimated future value of the vehicle. This allows you to adjust your budget accordingly depending on how much of a deposit you can afford versus how much you can outlay per month during the term. This allows you to have flexibility for your funding and can prioritise your payments depending on which option suits you and your circumstances more appropriately.

At The End Of The Agreement

Once the term has run its course and all payments have been made, the remaining balloon allows you to pay a lump sum to purchase the car outright and keep it. More and more of our customers are choosing to make additional payments, extending the lease, or refinance their balloon payment in order to keep the car they have, rather than having to raise funds to pay the full amount owed all in one go.

Not only does this mean that you no longer need to find what is often a considerable amount of money to pay all at once, but by financing the deferred balloon, your monthly payment is often less than what you had been paying for the original lease. Which again would be lower than the cost of leasing another new car to replace the one you already have.

Financing a car in this way has a range of benefits from potentially requiring a less budget to allow you to free up funds for other uses, to the lower payments allowing you to choose a higher specification vehicle than you were originally budgeting for. Not only that but you could also benefit from tax allowance benefits if you are leasing the car through your business, as well as being able to free funds up for the business thanks to the potential lower deposit.

Other Factors

As well as the interest rate, the amount you pay on a Lease Purchase agreement is also governed by the deposit you are putting in and the average annual mileage you will cover (in order to work out the future value for the balloon). It is important to know that the interest charges also cover the final payment. Effectively the deposit and monthly payments should cover the price you have paid for the vehicle and its future value at the end of the agreement.

A large balloon (and deposit) may make the monthly payments cheaper for the length of the term, however the final payment will be more expensive at the end of the agreement, and vice versa. Therefore it often means that agreeing a lower balloon will mean that although your monthly payments may be higher, once the term has ended you have less to pay in order to take ownership of the vehicle.

It also means that should you be looking to extend the agreement or refinance the final payment, if there is a lower amount left to pay you should be able to take advantage of lower payments for the remainder of the outstanding balance. As with the majority of finance agreements, you don’t take ownership of the vehicle until you have made the final balloon payment. It can also be settled at any point by requesting a settlement figure, although this is likely to also include any penalty charges to cover some of the interest that would have been paid during the agreement.

How Is A Lease Purchase Different To A PCP?

A Lease Purchase may sound very similar to a Personal Contract Purchase, or PCP, however it differs in one very important way. As explained above with a Lease Purchase you have to settle the remaining amount owed on the vehicle in the form of the balloon payment, whether paid in full or refinanced. However, with a PCP you get the option to return the car if you do not wish to keep it. Any difference between the balloon payment and the value of the car at this point is either written off by the finance company if it is negative, or given back to the customer if the amount is positive. The latter often allows for the ability to use any remaining equity in the car to be used as a deposit for another vehicle.

Another difference between a Lease Purchase and a PCP is that a Lease Purchase could offer a lower interest rate, perhaps resulting in a cheaper comparable monthly payment. This is because there is less risk to the lender as you cannot hand the car back at the end of the agreement. With the lender not liable should the value of the car be lower than the final balloon, they are sometimes able to offer a reduced rate. What’s more, due to being able to hand the car back a the end of the agreement, a PCP comes with mileage restrictions with agreed pence per mile charges and the potential for discrepancies with any damage or excess wear and tear.

A PCP is also usually only available on vehicles that are less than 5 years old, with a Lease Purchase this is often not the case. Although many of the aspects of the agreement are similar to those that come with a PCP, it is easy to see why Lease Purchase could be a better solution depending on you, the vehicle you are looking to fund and your circumstances.

Oracle Car Finance

A Lease Purchase agreement is just one of the many options for funding your next car, but is one that is often overlooked, especially for private individuals who may not know it is available to them. Speak to your dedicated Account Manager today about potentially funding your next vehicle through a Lease Purchase, and how it may benefit you and your circumstances when compared to the range of finance products we offer at Oracle Car Finance.

At Oracle Finance we have your new car funding sorted, no matter which kind it is. Our expert Account Managers use our panel of specialist lenders to help you to find the perfect package, bespoke to you and your circumstances. Our team are always on hand should you have any questions about arranging car finance and your dedicated Account Manager is ready to take your call today.