Option to Purchase

Meaning and Definition

Option to Purchase, also known as a Purchase Option or Residual Value, refers to a contractual provision in a car finance agreement that grants the lessee (individual or business) the right, but not the obligation, to purchase the leased vehicle at the end of the lease term. The purchase price is typically predetermined and stated in the lease agreement, often referred to as the residual value. The lessee has the choice to exercise the option and purchase the vehicle or return it to the lessor at the end of the lease term.

Why it is important to know

Understanding the concept of the Option to Purchase is important for individuals considering leasing as a car finance option. The Option to Purchase provides flexibility to lessees who may want to keep the vehicle beyond the lease term. It allows them to evaluate the vehicle's value and their personal preferences before deciding whether to purchase it. Lessees should review the terms and conditions related to the Option to Purchase in the lease agreement to understand their rights and obligations at the end of the lease term.

Example in car finance

Suppose an individual enters into a car lease agreement with an Option to Purchase at the end of the lease term. The lease agreement specifies a residual value of £10,000 for the vehicle. After the lease term expires, the individual has the choice to purchase the vehicle for £10,000. They can decide whether to exercise the Option to Purchase based on factors such as the vehicle's condition, market value, their personal preferences, and any applicable purchase fees or charges specified in the lease agreement.