If you want to buy a vehicle outright, but
don't want to pay for the car in full, 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.
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 (to include Finance
Company's charges). 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.
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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.
- Low monthly payments – Payments are typically cheaper than hire
purchase and the same Consumer Credit Act protections
apply.
- 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.
- Maintenance packages – You may be able to negotiate a
maintenance package for the duration of the lease purchase
agreement.
There are disadvantages to lease purchase too, including:
- 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.
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For private customers, lease purchase is best suited to those
who want long finance agreements as this will make your choice of
car more affordable. As there is usually no mileage tie-in you can
set it at any level depending on how high or low you want the
residual value to be.
For businesses, lease purchase requires expert handling.
There are a host of lease purchase deals available at Autobahn, so
contact us now!
Email Sales@autobahn.co.uk call 08456
444993 option 1.
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