A Lease Purchase agreement, often referred to as a “lease-to-own” or “rent-to-own” agreement, is a type of financing arrangement that allows an individual or business to lease a vehicle for a specified period with an option to purchase the vehicle at the end of the lease term.
Key Features of a Lease Purchase/Hire Purchase with Balloon Payment.
- Lease Period: A Lease Purchase agreement consists of two distinct phases. Initially, there is a lease period during which the lessee (user of the vehicle) makes regular lease payments to the financing company (owner of the vehicle). This lease period is typically ranging from two to five years.
- Purchase Option: The distinguishing feature of a Lease Purchase agreement is the option to purchase the vehicle at the end of the lease term. This purchase option is usually pre-negotiated and specified in the agreement. The customer has the right, but not the obligation, to buy the vehicle.
- Fixed Purchase Price: The agreement typically outlines a fixed purchase price for the vehicle at the end of the lease term. This price can be determined upfront and based on the anticipated mileage and age of the vehicle at the end of the term.
- Lease Payments: During the lease period, the customer makes regular lease payments to the financing company. These payments may cover the vehicle’s depreciation, financing costs, and any applicable fees. Unlike traditional leases, a portion of these payments may contribute toward the eventual purchase price.
- Down Payment: A Lease Purchase agreement will require an initial down payment or deposit. This upfront payment reduces the total amount financed and affects the overall cost of the agreement. In the case of a commercial vehicle. The deposit payment minimum would be the VAT element of the vehicles cost.
- Maintenance and Repairs: The customer is responsible for maintaining and servicing the vehicle during the lease period. This includes routine maintenance and addressing any repairs that may arise.
- Usage and Mileage Limits: The agreement may impose mileage limits and usage restrictions on the vehicle. Exceeding these limits could result in additional charges. The customers anticipated mileage is agreed initially and will then calculate the final payment (Balloon) required at the end of the lease purchase. This final payment is based on the age and anticipated mileage on the vehicle at the end of the term.
- Option Exercise: At the end of the lease term, the lessee can exercise the purchase option by paying the predetermined purchase price. This step officially transfers ownership from the financing company to the customer.
- Alternative Choices: If the lessee decides not to exercise the purchase option, they may have alternative choices, such as obtaining a settlement value from the financing company, Selling the vehicle after settling the outstanding settlement balance with the finance company. The customer also has an alternative option of acquiring the settlement value from the financing company, part exchanging the vehicle and the buyer then settling the outstanding finance balance, Then the customer has the option of entering into a new lease agreement. (Subject to status and acceptance).
- Credit Check: Similar to other financing agreements, a credit check will be required as part of the application process.
- Interest and Financing: Lease Purchase agreements include interest charges similar to traditional financing arrangements. The interest rate and terms should be clearly outlined in the agreement.
Lease Purchase agreements offer individuals and businesses the opportunity to acquire a vehicle through a leasing arrangement with the possibility of ownership. However, it’s crucial to carefully review the terms and costs of the agreement and to seek legal and financial advice to make an informed decision that aligns with your needs and financial situation.
Concerns of a Lease Purchase/Hire Purchase with a Balloon Agreement:
While a Lease Purchase agreement for a vehicle can provide certain advantages, there are also potential concerns and drawbacks that should be considered before entering into such an arrangement:
- Higher Total Cost: Lease Purchase agreements can result in higher overall costs compared to purchasing a vehicle outright. The combination of lease payments, potential interest charges, and the final purchase price can add up, making it important to carefully calculate the total amount paid over the term.
- Interest Charges: Similar to traditional financing arrangements, Lease Purchase agreements may involve interest charges, which can significantly increase the overall cost of the vehicle. The interest rate and terms should be reviewed and compared.
- Ownership Delay: The lessee does not own the vehicle during the lease period, which means they have limited control over the asset. This could potentially restrict the lessee’s ability to make modifications, sell, or trade the vehicle until the settlement is obtained and the purchase option is exercised.
- Depreciation Risk: If the market value of the vehicle decreases faster than anticipated, the predetermined purchase price at the end of the lease term might not reflect the vehicle’s actual value. This could result in the customer paying more than the vehicle’s market worth.
- Maintenance and Repairs: The customer is responsible for maintaining and servicing the vehicle during the lease period.
- Purchase Price Discrepancy: If the predetermined purchase price is significantly higher than the vehicle’s market value at the end of the lease term, the customer might face difficulties in justifying the purchase of the vehicle.
- Ownership Commitment: While the customer has the option to purchase the vehicle by making all of the payments including the final payment (Balloon), they can however choose to sell or part exchange the vehicle instead. This would require requesting a settlement on the agreement, negotiating a sale or part exchange of the vehicle – Settling the agreement to pass title to the new owner.
- Credit and Repossession Risk: If the customer fails to make payments or encounters financial difficulties, the financing company may have the right to repossess the vehicle. This can impact the customer’s credit rating and financial stability.
- Purchase Decision: At the end of the lease term, the customer must decide whether to exercise the purchase option, Or pursue other alternatives such as sale or part exchange of the vehicle. This decision can be complex and may require careful consideration of financial factors such as settling the balance of the finance agreement prior to the sale.
- Dependence on Vehicle Value: The customer’s decision to exercise the purchase option is closely tied to the vehicle’s market value. Fluctuations in the vehicle market can influence the customer’s choice and financial outcome.
Before entering into a Lease Purchase agreement for a vehicle, it’s essential to carefully review the terms, calculate the total cost, and consider the potential long-term financial implications. Seeking advice from financial and legal experts can help individuals and businesses make informed decisions that align with their needs and circumstances.
Within New Vehicle Solutions Limited there are a number of finance options we are able to provide. Based on our discussions and your responses to our questions we will have narrowed down this selection to the one that may be most appropriate given your personal circumstances and requirements. We do however believe it is important that in making the decision you are aware of all finance options we have available (some of which may not be applicable in your particular circumstances) and have relevant information on the options available. Further information on the types of finance options we are able to offer can be obtained from organisations such as the Finance and Leasing Association www.FLA.org.uk or the Money Advice Service www.moneyadviceservice.org.uk. Details of alternative finance options and their explanations will be provided to you as part of our Initial Disclosure Terms of Business document.
New Vehicle Solutions, Tremains Road, Bridgend, South Wales, CF311TZ
Company Registration Number: 8572112 – VAT Number: 166595858
New Vehicle Solutions Ltd is authorised and regulated by the Financial Conduct Authority, our firm reference number for consumer credit is 685872 New Vehicle Solutions Ltd is an Appointed Representative of AutoProtect (MBI) Limited which is authorised and regulated by the Financial Conduct Authority for Insurance Mediation, their reference number is 312143.
We are a credit broker and not a lender.
We are permitted to conduct Credit Brokering, Debt-Adjusting and Debt-Counselling in connection with the whole or partial settlement of credit agreements for vehicle finance and consumer hire agreements.
New Vehicle Solutions Limited does not and will not charge any fees for providing any Consumer Credit services.
Some of our lenders may charge administration fee’s to set up your agreement.
Whichever lender we introduce you to, we will typically receive commission from them (either a fixed fee or a fixed percentage of the amount you borrow). The lenders we work with could pay commission at different rates. However, the amount of commission that we receive from a lender does not influence the amount that you pay to that lender under your credit agreement. Any renumeration amounts can be requested by emailing [email protected] and disclosed prior to the conclusion of the transaction. Our aim is to secure finance for you at the lowest interest rate you are eligible for from our panel of lenders.
Last Updated: 01/08/2023