It is an understatement to say that rental with option to purchase (LOA) is on the rise among the French !
Over the whole of 2017, the financing of new vehicles on lease with an option to purchase (LOA) recorded a marked increase of 13.7%. In total, one in three new cars was purchased using a LOA. Some brands approach or even exceed the 50% mark. This is for example the case of Mercedes, Smart, Mini, BMW, Tesla Motors, Volkswagen, Audi, etc.
Leasing with an option to purchase has the double advantage of requiring a low initial investment and of having you constantly drive with a recent vehicle. However, is it still worth giving up ownership of your car like this or buy it back at the end of the rental period? The LOA is a very specific formula, subject to many constraints, and which may not be suitable for everyone.
LOA: principle and operation
“Rental with option to purchase”, sometimes also called “leasing” or “rental with promise of sale”, is a formula that allows you to rent a vehicle for a predefined period, which ranges depending on the case from two years (24 monthly payments) to five years (60 monthly payments). At the end of this contract, the tenant has two options: firstly, he can choose to buy back the vehicle at a price defined in advance as soon as the contract is signed, in which case he becomes the owner of the vehicle. Conversely, he can waive the exercise of this option, which means that the rents paid – which typically represent 60% to 80% of the price of the new vehicle – are definitively lost.
A lease-to-own agreement should provide you with at a glance all relevant information and characteristics of the offerand especially :
- The identity of the two parties (rental company and tenant)
- The duration of the rental and the date of the first monthly payment
- The amount of the security deposit and its terms of return
- The redemption value of the vehicle (or “residual value”) at the end of the rental period.
In some aspects, an LOA is assimilated by law to a form of credit – a credit company buys the vehicle on behalf of the client, and then provides it to him for hire – but there are still many differences. In the case of a rental, professionals are not obliged to show an annual percentage rate of charge (APR) which reflects all the costs of the operation.
LOA without contribution: is it possible?
Leasing with option to buy a vehicle sometimes requires the customer to provide an initial down payment, which will then be considered as a “monthly payment 0”. A manufacturer’s advertising offer can thus display, for example, a “first monthly payment of €2,000 followed by 48 monthly payments of €150”. However, new LOA offers are developing in parallel and removing the constraint of the contribution to be provided.
What is the best LOA offer without contribution?
Not having to provide a down payment makes it possible to extend access to rental with option to buy to all drivers who have no available savings or who wish to keep it for other projects. Builders and financing organizations have thus created LOA offers without input. During the first quarter of 2019, you can ride with:
- an SUV: the Dacia Duster is less than €150/month;
- a city car: the 3-door Mini for less than €295/month;
- a family car: the BMW Gran Tourer is available for a rent of €470/month;
- and even electric or hybrid: Lexus offers its CT 200h model for €299/month.
So you have a multitude of choicesand this always without contribution!
Can we change car during the LOA?
You move ? Did you get a promotion? Your family is growing? The reasons for wanting to change vehicles during the term of the LOA exist. It is not possible to change vehicles directly during the term of the contract.
On the other hand, it is always possible to end the contract and part with the current vehicle, as described below. Once this operation has been carried out, you are released from your commitment and you can change vehicles as you wish.
How to terminate an LOA?
To terminate an LOA, three options are available to the driver.
- First possibility: return the vehicle
This solution is always possible. On the other hand, the lease with option to purchase provides for penalties to be reimbursed. These can be substantial. It is therefore essential to carefully study the content and wording of your contract before making such a decision. Then simply send a registered letter to the funding body.
- Second possibility: transfer the contract
Just as you can sell a vehicle that you own, it is possible to find a buyer to a lease with option to buy. It is of course essential to obtain the agreement of the credit organization to be able to finalize such an operation. Transfer fees may be applied, but will be lower than during the outright termination of the LOA contract.
- Third possibility: redeem the contract
This possibility is a little more complex to implement. Indeed, it is necessary that the new dealer practices this technique which consists, for him, in buy back your LOA. He must thus pay the penalties and take care of the resale of the vehicle.
LOA and LLD: what are the differences?
Warning: the LOA should not be confused with the “long-term rental” (LLD)who does not provide any redemption option at the end of the contractor even yet with balloon credit.
Indeed, the LOA leaves the possibility to the motorist to buy the vehicle at the end of the contract, without being forced to do so. Conversely, the LLD is a simple rental, and the vehicle must be returned at the end of the scheduled period.
What are the conditions for obtaining an LOA?
It is necessary to approach a banking establishment or the dealer’s financing organization in order to carry out an LOA. The granting criteria are less restrictive than for obtaining a conventional loan. In particular, a contribution is not compulsory. In addition, it is necessary to provide certain documents in order toassess your ability to paysuch as the last 3 payslips or the last two tax notices.
LOA and car insurance: a delicate point
Car insurance is rarely included in the monthly payment. Most of the time, the rental company will not only force you to insure yourself, but also to choose an “all risks” contract top-of-the-range and therefore particularly expensive, including a guarantee against theft or fire with reimbursement for replacement.
In the event of theft, destruction or disappearance of the vehicle, in fact, you have in theory the obligation to continue to honor the contract and therefore to pay your monthly payments until maturity, as well as the redemption value. Insurance compensation – paid directly to the rental company – is deducted from this amount. If the insurer reimbursed the vehicle up to its residual value and not its new value, in other words, you would owe a large sum of money even though you are deprived of the vehicle. The “financial loss” option is therefore strongly recommended.
What are the advantages of the LOA for an individual
With the LOA, drivers wishing to drive permanently with a recent vehicle – and therefore in good general condition – can easily plan a stable and permanent “car” budget. Just as the latter remain free to sign, for example, a new lease every three years by recovering and reinvesting the security deposit each time. Tenants who do not yet know what they will decide in three or four years, likewise, are reassured by retaining the option of a purchase at the end of the contract, if they ever wish to abandon the LOA system and regain ownership of their vehicle.
When it is accompanied by a moderate security deposit and does not require any personal contribution, the LOA often requires less financial effort than a car loan during the first years. This means that for an equivalent amount, you can drive a more upscale car than if you had taken out a loan.
What are the disadvantages of the LOA?
Leasing with option to buy brings with it its share of constraints, and you may regret the freedom that was yours as an owner of your vehicle!
- An LOA contract requires you maximum mileage per year. This detail can of course be modulated upwards before the signing of the contract and according to your needs, but in this case expect an increase in the monthly payment. On average, a gasoline vehicle will be limited to 12,000 or 15,000 kilometers per year, while a diesel vehicle can travel up to 25,000 kilometers. Exceedings are subject to a significant supplement, of the order of 5 to 10 euro cents per kilometer.
- The gray card tax and technical control after four years remain entirely at your expense, and of your whole responsibility. The same obviously applies to traffic offenses that you may commit while driving.
- A maintenance contract with the manufacturer may be included with the LOA, but this is far from always the case. You will then need pay a little more for regular check-ups and prompt repairs of the vehicle. Impossible indeed to ignore this expense insofar as…… the cost of repairing the vehicle, at the end of the rental, can prove to be a cold shower for the tenant, and swallow up a good part of his security deposit! The contract requires the return of the vehicle in a perfect state of preservation, and the slightest scratch on the bodywork or task in the passenger compartment will be subject to invoicing, at an unforeseeable amount. However, there is no need to worry about this point if you intend to buy the vehicle.
LOA, LLD or car loan: what to choose?
On paper, leasing with option to buy is an attractive formula. In effect, leasing represents an interesting compromise between the ownership of your personal vehicle (via a classic car loan) and a rental stricto sensu (via a long-term rental, for example).
However, the choice of a type of contract must be made according to your needs. Performing an LOA simulation with or without input is necessary. Will you change vehicles regularly? Do you do a lot of kilometers per year? Would you like maintenance included for peace of mind? All these questions will allow you to position yourself on the appropriate type of financing: LOA, LLD, balloon loan or classic car loan.