How a Lease Purchase Program Works

October 16, 2013

It's easy to make a costly mistake when comparing different lease purchase program offers. Learn how lease purchase programs work, and what to look for.

Automobile Lease

If you are thinking of leasing your next new vehicle, you might be unaware that there are ways to first lease then buy your new vehicle, and while a lease purchase program is not commonly associated with the car industry and is more appropriate for real property purchases, there are ways that you can first lease then later on buy a particular vehicle.

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How a Lease Purchase Program Works

Many people choose to lease a vehicle rather than buy it because of the relatively low upfront costs and lower monthly car payments. However, at the end of the lease you do not own the vehicle and must return it to the finance company that you leased it from. Usually, you will lease a vehicle for a term between two and four years and then simply turn the vehicle in. However, most lease contracts will offer you the option to purchase the vehicle at the end of the lease term.

The residual value of a leased vehicle is the amount determined at the time of the signing of the lease that refers to the amount that the leasing company believes the vehicle will be worth at the end of the lease. While it is impossible to tell what the residual value of any particular vehicle will be, the residual value offered by most leasing companies will probably be more than the vehicle will actually be worth. If you know how to use this to your advantage you can make a good deal and purchase a vehicle at the end of the lease.

How to Purchase Your Leased Vehicle
At the end of your car lease, you will be afforded the opportunity to either purchase the vehicle at the lease company's residual or you will have the option of simply walking away with no further obligation. Nevertheless, there may be times when you have enjoyed the experience with a leased vehicle and want to keep it, or you simply don't want to purchase a new car for whatever reason. If this is the case, you have a window of opportunity to purchase your leased vehicle.

While the leasing company set a residual value at the beginning of your lease, there is no reason that you should pay that amount. Most leasing companies will usually be open to negotiating the residual value of a leased vehicle, especially if identical make and model used vehicles are selling for a lower price. Therefore, you should do as much research about your type of vehicle as possible and try to accurately gauge what similar vehicles are selling for.

Once you have accurate pricing information, make an offer to the leasing company. Many times, the leasing company may accept your offer to avoid taking possession of the car and then having to sell it at an auction—often at a price even lower than you have offered.

So if you really want to keep your leased vehicle, you should make the leasing company an offer and save even more money. You leased your vehicle so that you can save money in the short term, but by buying your leased vehicle at a lowered negotiated price, you will usually save a lot of money when calculating your total cost of ownership for a vehicle.

Financing Considerations
Should you choose to purchase the vehicle that you have previously leased, you will need to arrange for additional financing. In short, the lease and the purchase of the vehicle are two entirely different transactions and you will need to shop around for the best rates on a used car loan as that's the type of loan that you will need to purchase your leased vehicle.

How to Find the Right Lease Purchase Program

A lease program has multiple parts that you should understand before you enter into a lease agreement of any kind. First, there is the auto lease rate. Think of a lease as a company purchasing your car from the dealership, and allowing for you to use it temporarily; your lease rate is essentially the rate you pay for permission to use that car. It is calculated slightly different, but is very much like the interest rate for a car loan. The best lease program is also made up of the overall price, combined with residual value (how much the car is worth at the end of the lease agreement).

Lease Research
Once you know what goes into a lease program, it is time to start your lease research. Start by locating various auto leasing companies, both in your area and on the Internet. Many will advertise various lease rates, though your specific rate will depend on your credit score more than anything. For a closer idea of what to expect, and to see if you're really getting the best deal, there are websites that list national averages for lease rates at different credit scores.

Price Negotiation
Once you have an idea of what to expect to pay, start contacting multiple leasing companies. Many of the best deals can be found from the makers of whatever car you're purchasing, such as GM's GMAC, or Toyota's Toyota Financial Services. Use quotes from multiple companies to do some price negotiation. Also, many will companies will drive the price down more if you can afford to put a higher security deposit down. This is highly beneficial, as you'll get your security deposit back at the end of your lease agreement anyway.

Lease Purchase Programs for Commercial Vehicles

For businesses in need of commercial vehicles, lease purchase programs exist to help your enterprise get rolling with whatever it needs to stay competitive. Lease options are more attractive for business owners in search of a commercial fleet, executive vehicles, or even tractor trailers. Because they are usually leasing in volume, the leaser has an incentive to cut the lessee a deal. When considering leasing commercial vehicles, it is best to run through your options and know exactly what they mean.

Commercial Lease Incentives
When leasing in bulk, as a business owner, you should demand that you get something extra for your business. For a private party leasing a vehicle, there are typically mileage restrictions, end of lease wear and tear conditions, and a residual value set for the end of the lease. So if you, as a private lessee fall into these areas, you'll end up paying fees upon the return of the vehicle.

For commercial leases, on the other hand, you should see to it that the lease is structured so as many of these variables as possible are avoided. A lease purchase program aims to do just that.

Lease Purchase Programs
Depending on who you work with for your commercial lease, it is possible to lease a fleet of commercial vehicles with:

  • No mileage restriction
  • No wear and tear conditions
  • A high residual value

With a high future value of the leased vehicles, your lease payments will be lower. Additionally, fixing your options for the end-of-lease buyout is important. At the end of the lease you want the option to purchase the vehicles, sell them to another party or trade them at a dealership. The end of lease value should be set right at the start of the lease. Some commercial vehicle lease companies may allow you to purchase the vehicles from any dealer, even install equipment, paint or decals without penalty.

Type of Lease
When leasing, you have the choice between an operating lease and a capital lease. With an operating lease, the expense is kept off of your books and considered an operating expense. The flipside is that your business assumes no role in the ownership of the vehicle(s). A capital lease is considered both an asset and a liability for the lessee, which then gets to write off depreciation and the annual interest expense. Consider both options when you discuss the lease terms with your leasing agent and your accountant to arrive at a favorable situation.

Lease purchase programs are a great way to equip your business with a commercial vehicle fleet or any combination of cars and trucks. There are many benefits to leasing in bulk, so it's a matter of discussing the details to figure out what is right for your business and acting accordingly.

When a Lease Purchase Program is Useful

In the United States, a lease purchase program is something that is not really associated with the car industry. While there are ways to purchase a vehicle that you are leasing, the lease and the purchase are two very distinct and separate transactions. People may choose to purchase a vehicle that they have been leasing for various reasons. Whatever the reason, there are times when purchasing a vehicle at the end of a lease may be a good idea.

When to Purchase an End of Lease Vehicle
You should consider how much money you've already invested in the vehicle, what the vehicle is presently worth and how much potential future repairs may cost. So, when thinking about whether to buy your leased vehicle or not you should consider how much of a down payment you made at the beginning of the lease, how many of the drive off fees were rolled into the lease payments, and how much the residual value of the vehicle is at the end of the lease.

Although the residual value for the vehicle was set at the time you signed the original lease contract, that residual value may be much higher than the vehicle is actually worth. If you wish to keep the vehicle you should do some comparison shopping for similar vehicles in your area and try to determine what the actual market value of your vehicle is, as well as the average high and low selling prices for the vehicle.

If you find a similarly equipped make and model vehicle that is the same as yours, and that vehicle is selling at a dealership for a lower price, then this might be used as a negotiating tool to get the leasing company to reduce the residual value on the lease contract.

If the leasing company agrees, you will be able to purchase the vehicle at the negotiated and reduced residual price. However, you should be aware that the leasing company may not be willing to negotiate a better price if you have gone over the allotted number of allowable miles by a significant number. Many times, the leasing company will make more money by charging you for the extra mileage and simply selling the car at auction. However, if you are not significantly over your mileage allotment, it is a good time to negotiate a deal.

Other Considerations
By negotiating a lower selling price at the end of the lease, you can stick the price savings in your pocket and save even more money on the total cost of owning your end of lease car. However, you should be aware that even if the leasing company does accept your offer to purchase the vehicle at lower negotiated price, you will need to arrange used car financing the same as you would if you were purchasing is a used vehicle off of a dealer's car lot. Many times, while finance leasing companies lease vehicles—some leasing companies do not provide conventional used car loans.

How to Tell If a Lease Purchase Program Is Right for You

A lease purchase program can offer you the best of both worlds. You lease the vehicle with the option to purchase it at the end of the lease. If you prefer, you can also return the car at the end of the lease period.

Mileage
There is always a limit on the number of miles you can do under a lease. If you exceed this, you have to pay an extra amount for each mile. If you do plenty of driving, usually more than 15,000 miles each year, a lease purchase program might not be the best option.

Down Payment
You can obtain a lease with no down payment, which can help those with no savings. That's especially true under a state lease purchase program, although most of those have been closed. Note that you'll pay less monthly on the lease if you do make a down payment.

Good Credit
You need to have good credit in order to participate in a lease purchase program. Without that you won't get past the state lease purchase applications. Otherwise, you'll need to work out the best possible loan for those with bad credit.

Condition
At the end of the lease, before you purchase the car, it will be inspected and you'll have to pay for any damage or perceived damage. This can quickly amount to hundreds of dollars more on the price. This amount can be removed if you're purchasing the vehicle after the lease. Remember, though, that if you choose not to purchase, it will be invoked and you'll need to pay in full.

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