What Is A Lease Purchase?

4 minutes Published: 16/01/2020

What's Covered

So you’re a big fan of leasing.

It’s affordable, easy, and stress-free. However, the constant changing of cars is frustrating.

It seems that as soon as you get used to your reliable lease car, and finally figure out what those buttons on the steering wheel do, it’s time to hand it back.

You’re not one for shiny new tech - your current lease car has everything you could ever want!

If this sounds like you, a ‘lease purchase’ might be worth looking into. 

We’re going to explain what a lease purchase is, and how it differs from a regular contract hire lease. Afterwards, we’ll have a look at the pros and cons of taking out a lease purchase deal!

What is a lease purchase deal? 

A lease purchase agreement is pretty much what it sounds like!

It functions similarly to a ‘regular lease’ in a lot of ways. You pay an initial rental (a deposit), and then pay monthly fees until the end of the agreement. 

The difference comes at the end of the contract. With a regular lease (known as a contract hire), you hand the car back. You’re no longer just leasing the car but have the option to become the registered keeper.

With the lease purchase however, it’s the exact opposite - you have to buy the car and have no option to hand it back.

The final balloon payment tends to be around 20% of the car’s value, but it varies depending on your finance company. 

Here’s an example to help you visualise exactly how a lease purchase works: 

  • You want a Ford Fiesta. The value of the car is currently £9000. You decide to go for a 48-month lease purchase deal. 
  • You stick down a £500 deposit, so you owe the lease company £8500. 
  • The APR interest rate on the deal is 9.8%, so your total cost, including credit, is £10,228 (not counting the £500 deposit). 
  • For your final payment, you opt to pay 20% of the amount owed. 
  • Therefore, you’ll make 48 monthly payments of £162 and then a final payment of £1946.

We know what you're thinking...

That sounds like a PCP agreement...

There are a few differences between a PCP deal and a lease purchase that make it distinctive. 

With a PCP, you don’t actually have to buy the car - you just have the option to. Most people actually choose to return the car, and not bother buying it. 

In a lease purchase, you have no choice but to buy the car - you’ve agreed to take ownership of the vehicle. So why not just take out a PCP and have the option to change your mind? 

Here are a few advantages of a lease purchase over a PCP: 

  • Lower cost per month: Due to paying up for an initial deposit (also known as an initial rental),  and then deferring the big payment to the end, your monthly repayments are low compared to a PCP deal. 
  • Nicer car: Thanks to lower monthly payments, you can easily afford a car of a higher spec than you could with a PCP.
  • Flexible: Most dealers let you choose the exact length of your finance agreement, although the average range is from 2-5 years. If you get around to the end of your term and for some reason, you can’t afford the final balloon payment, you could take out additional finance to pay it off.  

Of course, there’s still an element of financial risk with a lease purchase. The estimated value of the vehicle that was made at the start of the term could be totally wrong. For instance, your BMW 3 Series might have rapidly devalued - so you could end up overpaying for the car. 

what is a lease purchase

Is a regular contract hire lease better? 

We think that a contract hire lease is a better option for most people. This arrangement allows you to change cars every couple of years, which means a brand new car, so no worrying about getting it MOT’d etc. 

Also, if you’re not rolling in cash by the end of the contract term, you don’t need to worry about being committed to making a substantial lump sum.

However, for those that really do want to own the car eventually, a lease purchase is a good option. It affords you the low monthly payments of a lease deal, and allows you to become the owner.

Summary: 

A lease purchase is basically a regular contract hire lease deal, but instead of handing the car back at the end of the term, you have to pay up to own it. 

It’s ideal for drivers who want to drive a nice car, but who want to make small monthly payments and buy it out at a future date. 

If you want a more comfortable life and don’t want a big payment looming over you for the next few years, go for a contract hire lease. This lets you get a brand new vehicle every couple of years, and the mileage limits are enough for regular driving. 

To find the right car lease deal for you, check out LeaseFetcher.