Purchase lease starts with the retail value of the car and then the leasing company works out what the car should be worth in the future, this is know as the residual value, they take one away from the other and divide up over the term and you get the monthly rental. Therefore the better a car holds it value the better the deal.
What you pay, first there is a deposit which usually is about three months payment and then there is the monthly repayments and finally the end balloon payment, you do not have the option to hand the car back. Most lease period are two to four years and most companies allow settlement of the agreement at any point during the contract.
PROS AND CONS
Luxury/High End Cars Lease purchase is well suited to this end of the market as you must take on the residual value risk and the higher the residual value the lower the repayments
Company asset Lease purchase is useful to companies that want to retain the vehicle as an asset
Low monthly payments – these are usually cheaper than hire purchase, but you still have the full protection of the Consumer Credit Act.
Balance Sheet – the vehicle can appear on the balance sheet and you can write down the value against taxable profits
Ownership once the balloon payment is made then it is yours.
The Cons
The balloon payment – you must have the finance to pay this it is not optional and in some cases the actual worth of the car may be less than the residual, dependant on the market place
VAT is not recoverable, vat is only recoverable when the vehicle is used only for business use.
Ownership – the car is yours and you have the risk of the residual value, maintenance and disposal.
Who is suits lease purchase?
For private individual it is a good option if you want long term finance agreement and it may make the car of your choice more affordable there is not mileage tie and so you can set this as low or high as you want this will reflect on the final residual value.
For Businesses as listed above the vehicle can go on the balance sheet and the lower payments frees up cash flow, whilst the vehicle becomes an asset.