Lease Purchase (LP):

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With a lease purchase agreement, you’ll usually put down a deposit to take the car away. You’ll then make monthly payments towards the cost of the car, but you won’t actually own it (or be able to privately sell it) until the final payment (or balloon payment) has been paid – along with an extra ‘option to purchase’ fee, usually around £1.

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What’s more, with a lease purchase agreement your debt is secured against the car – so if you stop making your payments, the company may take the car off you to recover the money you still owe.

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When you get a car lease, you don’t ever actually own the vehicle, you just make regular payments for using it. How much you’re charged is usually based on the value of the car, how long you’ll use it for, and an agreed mileage allowance.

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You may pay less each month than if you were paying off a car bought on credit, but there may be extra costs involved. For example, if the car’s a bit scuffed up at the end of the lease, you may be charged an ‘excessive wear and tear’ fee.

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You’ll probably need fully comprehensive car insurance, or any damage to the vehicle will need to be paid for out of your own pocket when you return it. Some companies may insist you also take out gap insurance, which gives them more protection against damage or theft.

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Note that if you end a hire purchase agreement early, you may have to pay a penalty fee.

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• Hire Purchase (HP):

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Hire purchasing (HP) spreads the cost of your dream car over affordable fixed monthly payments, and at the end of the contract period, the car is yours to own! This form of car finance works in two easy steps:

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1. Put down an initial deposit of three, six or nine months, whichever period of time is most comfortable for you

2. Pay an agreed monthly payment. This is based on the value of the car; the deposit you put down; the length of the agreement; and the interest charged (which is influenced by your credit score). HP contracts usually last from 24 to 60 months.

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With HP, the larger the initial payment you put down and the better your credit score, then the lower your interest rates and as a result the lower monthly instalments will be.

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Payments are decided by a finance company as Elect is a broker, not a lender. With an HP car, although it is yours to own (or sell) at the end of the contract, you are still able to upgrade to another vehicle via part exchange. If you prefer you can end the contract through a settlement fee.

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• Personal Contract Purchase (PCP):

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PCP loans are one of the most common forms of new car finance, but they can also be one of the most complex. With PCP, you won’t buy the car outright. Instead, you'll put down a non-refundable deposit towards the vehicle’s price, and borrow the rest. You’ll then make monthly payments to cover interest and the cost of depreciation (i.e. what the car loses in value while you have it).

At the end of the contract, you’ll usually have a few options:

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• Buy the car outright – you’ll need to pay the value of the car (usually agreed at the start of your contract) minus your deposit. There may also be an additional fee.

• Trading it in for a replacement with a new PCP contract.

• Returning it – there won’t be anything more to pay, as long as you’ve kept to the terms and the car isn’t damaged.

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PCP loans are often used by people who like to change their car regularly. They carry the advantage of being quite flexible, and they usually offer low monthly payments since you’re not paying off the car. However, the interest rates are often higher than other types of loans. You should also read the small print very carefully – in particular, watch out for penalty charges for exceeding the mileage allowance, and for damage to the car while you’re using it.

 

Note that to get approved for a PCP agreement, you’ll usually need a good credit history, especially for low APR deals.

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What is the difference between a Lease Purchase and Personal Contract Purchase agreement?

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With both a Personal Contract Purchase (PCP) and Lease Purchase (LP), monthly payments do not contribute to the cost of the vehicle but cover the depreciation of the vehicle over the lease length. This simply means you will be repaying the difference between the value of the car at the start and what it will be worth at the end of the agreement. The big plus side of this is you have lower monthly payments, making LP incredibly affordable for cars otherwise outside your budget.

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Where the two agreements differ is in the options available at the end of the agreement. Unlike an LP where you own the vehicle once the balloon payment has been made, you would have the option to return the car with no extra charges if opting for a PCP agreement. The key difference between LP and PCP is that the balloon payment is compulsory with the former.

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Contact us for more information - our specialists will walk you through the different options available and best suitable to you.

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