Lease with option to purchase (LOA): how does it work?

Lease with option to purchase (LOA): how does it work?

Leasing with an option to purchase (LOA), also called “car leasing” or “leasing”, is increasingly used as an alternative to car credit to finance the purchase of a car. What are the pros and cons of renting with an option to buy? Auto loan or LOA, how to choose? Should I insure a leased vehicle?

A credit commits you and must be repaid. Check your repayment capacity before you commit.

What is a lease with the option to purchase (LOA)?

The lease with the option to purchase (LOA) is consumer credit. It makes it possible to have a car by paying monthly rent to the bank or to the organization which manages the credit and which owns the car.  

The duration of the LOA is generally 2 to 5 years. At the start of the rental, the tenant leaves a security deposit (approximately 15 to 30% of the initial price). At the end of the LOA contract, the vehicle can be purchased and acquired definitively by the lessee (for a price that takes into account the amount of rent already paid and the security deposit). Otherwise, the vehicle must be returned to the owner, and the security deposit is recovered.

This type of financing was originally reserved for new cars and business fleets. It has now become more popular for individuals and used cars. 

A lease with the option to purchase (LOA) is the main financing for the purchase of a new car.

The French are increasingly resorting to leasing with an option to buy for the purchase of a new vehicle. This method of financing was up 4.2% in 2019. They represented 75% of new car financing transactions.

Why choose a lease with the option to purchase (LOA)?

Leasing with the option to buy is particularly suitable for motorists who are looking for a recent car and who wish to be able to change it regularly while paying less rent than a monthly repayment of a car loan.

With or without contribution, the rent for a new car will generally be a few tens of euros lower than the monthly payment of a car loan, for the same model. The rent can include the cost of vehicle maintenance and repairs, which makes it easier to manage your budget and avoid unpleasant surprises at the garage.

LOA or car loan: which to choose?

Strengths and weaknesses of leasing with an option to buy and auto credit:

The advantages of Leasing with Option to Purchase (LOA)

  • Drive a recent vehicle, new or used, and change it regularly
  • The overall cost (vehicle + repairs and maintenance) is known in advance
  • The commercial guarantee runs for the entire duration of the rental.
  • The rent of the LOA is lower than a monthly car loan

The disadvantages of Leasing with Option to Purchase (LOA)

  • Auto insurance is higher in all risks
  • Less offers for used cars
  • The overall cost is higher than that of a car loan
  • The amount of the security deposit can be high
  • Maintenance is mandatory in the manufacturer’s network

The benefits of auto credit

  • Many offers of new and used vehicles
  • The borrower immediately owns the car
  • Resale is possible at any time
  • The overall effective rate of the credit is known in advance

The disadvantages of auto credit

  • the monthly payments are higher than rent in LOA
  • The commercial guarantee is generally shorter than the term of the credit
  • The maintenance of the vehicle is to be expected

Rental vehicle insurance with the option to buy

Like any vehicle, a vehicle rented with an option to buy must be insured. It is the tenant who must take out the car insurance contract and not the owner.

The lessee must insure the vehicle by taking out at least a civil liability guarantee (third-party insurance). In general, the organization that manages the rental with the option to purchase requires the lessee of the vehicle to take out additional guarantees such as all-risk insurance and financial loss insurance.

Lease with option to buy: financial loss insurance

Financial loss insurance covers, in the event of theft or destruction of the vehicle, the difference between the compensation offered by the insurer and the part of the rent remaining to be paid by the lessee of the vehicle.

By aamritri

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