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Buying a car on lease purchase

Businessman with a car bought on lease purchase
Lease purchase: similar to buying a car on hire purchase but with more flexible payments

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30 March 2016

The lease purchase car buying low down

  • Like hire purchase but with lower monthly payments followed by a larger final payment
  • This larger final payment is usually called a balloon payment
  • Lease purchase is a useful way to purchase more expensive or premium vehicles in a structured manner
  • As there’s no VAT on the monthly instalments, it’s useful for non-VAT businesses
  • The car will be shown as an asset on your books

ONE of the finance products you might want to consider for your next business car is lease purchase – particularly if your business in non-VAT registered.

In many ways lease purchase is very similar to hire purchase – except that you pay lower monthly repayments followed by one final payment at the end of the agreement.

This final payment – often referred to as a ‘balloon’ – pays off the final amount owing which will have been agreed at the start.

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Unlike contract purchase or personal contract purchase, where you can decide to pay the final amount or not, with a lease purchase agreement you must pay that final balloon.

Why use lease purchase rather than hire purchase?

Good question. It’s more down to your cash flow in the business.

It might help you to pay lower payments at first knowing that later on, as business increases, you can afford the final deferred payment.

Or you might want to reduce the monthly payments further by putting down a greater deposit at the start.

You see, flexibility is key to lease purchase, and at the end of the agreement, once you’ve paid that final amount owing, you are free to keep the car as long as you want, or sell it of course! And if that final amount has been calculated correctly to reflect the expected car’s value, then if you sell it, you won’t be out of pocket.

A typical lease purchase agreement lasts between two and four years and will be structured against mileage. The agreement period – the ‘term’ – will often look like this: 36 months and 30,000 miles, for example.

The expected mileage is required to work out that final payment.

The car you buy will be shown on your books as an asset, and can be written down against profits in the normal way.

What are the disadvantages of lease purchase?

You must pay the final amount at the end of the agreement – if you can’t find the full sum, then you can always agree a secondary finance agreement that pays it off.

But you must pay it off.

You are also subject to volatility in the used car market. If values weaken and the car becomes worth less than the agreed final amount, you will have to find the shortfall if you planned to sell it to cover the final amount.

But overall, lease purchase is a highly flexible way to get the car that you want on monthly payments that fit in with your company’s cash flow.

 

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Ralph Morton

Ralph Morton

Ralph Morton is an award-winning journalist and the founder of Business Car Manager (now renamed Business Motoring). Ralph writes extensively about the car and van leasing industry as well as wider fleet and company car issues. A former editor of What Car?, Ralph is a vastly experienced writer and editor and has been writing about the automotive sector for over 35 years.

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