What Is A Lease Purchase Agreement?

Last Updated: 27th Sep 2018
What Is A Lease Purchase Agreement?

13th April 2017

Lease Purchase is a conditional sale finance agreement. It is similar to the PCP in terms of low regular monthly payments, however, at the end of a Lease Purchase agreement, you pay to own the car, rather than being able to hand it back. A Lease Purchase agreement can be taken out on any car, but it is ideal for those looking at premium models.

What is Lease Purchase?

Lease Purchase is a finance agreement that allows you to purchase a car over a period of time. It is split into three parts. There is a deposit followed by monthly payments and ends with a guaranteed minimum future value also known as a balloon payment. Lease Purchase agreements commonly run between 24-48 hours with the rare exception reaching 60 months.

At the end of the agreement, you will own the car by paying the balloon payment. After that, you can choose to do what you wish with the car. LP agreements aren’t as flexible an agreement as a PCP agreement is.

How does a LP agreement work?

Lease Purchase agreements are split three different ways. The first being the deposit you place on the car. The higher the deposit you pay, the lower your monthly payments will be. Deposit amounts are usually split three different ways.

  • Initial three-months worth deposit
  • Initial six-months worth deposit
  • Initial nine-months worth deposit

The second part is the monthly payments. These will have to be paid every month for the duration of the agreement. The amount of these payments is decided by taking into consideration your anticipated annual mileage allowance, how old the car is and the length of the agreement. The longer the agreement, the cheaper your monthly payments will likely be, however, the more interest you will pay. The more mileage you drive, the higher your payments will be.

How does a LP agreement end?

Lease Purchase agreements end one way. You own the car by paying off the GMFV. This is agreed at the start of the agreement and you must pay it at the end. There is no option for you to hand the car back to the lender.

The GMFV is calculated at the beginning of your agreement and is determined by how much your car will depreciate by and how much it will be worth at the end. You can pay it either through a single one-off payment or by taking out an alternative finance agreement.

Once you have paid the balloon payment, you have full control over what happens next as the legal owner of the vehicle (until you pay the final payment, you don’t legally own the car). There is an option to part exchange it and upgrade if you decide that you want a new car.

If Lease Purchase sounds like the right way for you, we have a great selection of cars available here.

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