Lease Purchase

Roman Danaev2022-05-25

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Meaning and Definition

Lease Purchase, also known as Hire Purchase with a balloon payment, is a type of car financing arrangement that combines elements of both a lease and a purchase. With a lease purchase, the borrower agrees to pay fixed monthly installments over a set period, similar to a Hire Purchase (HP) agreement. However, at the end of the agreement, the borrower has the option to make a final balloon payment to own the vehicle outright.

Why it is important to know

Lease Purchase agreements provide borrowers with the flexibility to enjoy lower monthly payments compared to traditional HP agreements, as a portion of the vehicle's value is deferred to the final balloon payment. It allows borrowers to use the vehicle during the agreement term while deferring a significant portion of the purchase price to a later date. Lease Purchase is suitable for individuals who wish to keep their options open and have the intention of owning the vehicle at the end of the agreement.

Example in car finance

Suppose a borrower enters into a Lease Purchase agreement to finance a car. The agreement specifies a fixed monthly payment over a predetermined period, typically 2-4 years. At the end of the agreement, the borrower has the option to either make the final balloon payment, which represents the remaining value of the vehicle, or refinance the balloon payment or sell the vehicle to settle the outstanding balance. The Lease Purchase agreement provides flexibility for borrowers who anticipate being able to make the balloon payment and desire vehicle ownership.

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