In 2018, and for purchases on credit, leasing became the dominant mode of financing (55% of credit purchases ) in front of the affected car loan (37%) and the personal loan (32%). And within the lease, Lease with Purchase Option (LOA) largely dominates (94% of financing per lease), (Source: Committee of French automakers).
How does the LOA work?
A bank or a credit institution acquires the vehicle, chosen by the motorist, and leases it for a period of 2 to 5 years, or even 7 years. For the duration of the lease, the tenant must ensure the maintenance of the property and the payment of rents.
Unlike credit, the motorist does not own his vehicle but renters for the duration of the contract.
At the end of the contract, the renter may decide to lift the purchase option to become the owner of the vehicle for its residual value, defined contractually at the beginning of the lease. In the opposite case, he returns the vehicle and recovers the deposit paid to the subscription. The LOA is an attractive solution for motorists who change vehicles frequently and wish to overcome the constraints and risks of resale. The total cost of the LOA operation depends on the model of the car, the duration of the rental and the mileage.
Rental with option to buy and lease do not affect the same people. The LOA is reserved for individuals, who do not act in the context of their professional activity. Leasing deals with businesses, regardless of their legal status, as well as consumers acting within the scope of their professional activity.
The LOA contract: between credit and rental
The motorist subscribes the LOA contract to the dealer who sells the vehicle to him, the contract being managed by the seller’s financial partner, or with his bank or another bank.
The lease with option to purchase is subject to the formalism of consumer credits when the amount of financing is less than 75 000 euros. The credit institution must ensure the creditworthiness of the tenant and consult the FICP.
The contract must describe the property covered by the contract, the cash purchase price of the vehicle, the duration of the lease, the amount and number of rents, the amount of the first possible rent plus the amount of the value. purchase of the vehicle at the end of the lease.
Unlike a loan, there is no indication of the annual percentage rate (APR) in a LOA contract. This makes comparison with a conventional credit offer impossible. And with the additional maintenance, insurance and other benefits, it is very difficult to assess the true cost of the LOA operation.
As for a conventional credit, the tenant has a right of withdrawal, within 14 days (Saturday, Sunday and holidays included) from the signing of the contract.
For long-term leases (LDD), without option to purchase, the credit provisions do not apply. The tenant does not have the right of withdrawal in particular.
Evaluate the cost of the LOA
The LOA offers highlight the absence of initial contribution payments and the low monthly payments to be paid each month. But we must remain vigilant because these small payments hide the real cost of renting.
If in principle the personal contribution is not necessary to benefit from the LOA, it is necessary to know that most establishments impose the payment of a first rent raised, 0 to 30% of the price of purchase of the vehicle.
This can be replaced or supplemented by a deposit, usually from 0% to 15% of the price of the property. This deposit is refunded to the renter at the end of the rental contract, if he does not buy the car, less any costs of refurbishing the vehicle. Or it is deducted from the surrender value of the vehicle, to settle to acquire the car.
The amount of rent is generally less than the amount of monthly payments of credit, over a period of identical settlement. Because the amount of rents is calculated on the cost of the vehicle during the duration of the lease (ie on 50 to 80% of the price of the new vehicle).
The LOA contract must also specify the surrender value of the vehicle, or residual value, at the end of the contract. The amount of the call option is known from the beginning.
The surrender value of the vehicle is often several thousand euros. The tenant must pay this amount to the financial institution at the end of the rental period, to acquire the vehicle.
The renter must insure the vehicle
The renter is responsible for the vehicle as if he owned it. In the event of damage to the vehicle, it must compensate the bank or credit institution.
He must, at a minimum, take out liability insurance, which is mandatory. But, most often, financial institutions impose the subscription of an insurance “all risks” with guarantees against theft, fire…
In addition, it is recommended to add a “surrender value” or “total loss” guarantee that corresponds to a “replacement value” guarantee. In case of destruction or theft of the vehicle, this guarantee compensates the loss of the vehicle on the basis of its purchase value. An insurance against all risks only compensates for the market value of the vehicle (according to its age, its rating, its mileage…).
In case of theft or destruction of the vehicle, the LOA agreement may provide that the tenant is required to pay compensation for early termination of the contract, based on the value of the vehicle.
LOA contracts frequently include a delegation clause : the benefits are paid directly to the bank or credit institution, the owner of the vehicle.
The replacement value guarantee is most often offered for a period of 6 to 24 months. For a longer LOA contract term, the financial institution will require the lessee to extend the subscription for this guarantee. Or he may require him to take out a “financial losses” insurance that covers the termination indemnity. These guarantees increase the cost of the LOA.
The tenant takes care of the maintenance of the vehicle
Although he is not the owner of the vehicle, the motorist must pay the registration certificate (gray card), the technical controls, the regular maintenance of the car and the fines in the event of a traffic violation… are most often offered as a complementary option to the LOA contract. This increases the cost of the operation. And he must respect the mileage allowed by the LOA contract. Additional kilometers traveled in the year may be charged additionally.
The renter does not want to buy and returns the vehicle
At the end of the rental, if the tenant does not wish to become owner, he must return the vehicle in perfect condition to the lessor. Failing this, a repair fee is charged, the vehicle must be returned without any scratches, shock, stain… on the body and in the passenger compartment, with limited wear of tires… The tenant may also be charged fees additional mileage.
The renter does not have to deal with the resale of the vehicle. The security deposit, which may be paid on subscription to the LOA contract, is refunded. Or it is reported as a report on a new LOA contract.
The renter wants to buy the vehicle
At the end of the rental period, the renter can acquire the vehicle by raising the call option. He must pay the amount of the call option (or residual value) that is indicated in the contract. The security deposit, if requested at the signing of the LOA contract, is deducted from the amount to be paid. Otherwise, the amount to be paid to buy the vehicle can be significant.
To pay the redemption amount, you can take out a loan from the financial institution of the LOA, your bank or another bank.
You must also have a new registration certificate issued, the cost of which varies according to the fiscal power of the vehicle and the region of registration.
Some contracts allow the early surrender of the vehicle, without waiting for the term of the LOA. A minimum lease period stipulated in the contract must be respected (frequently 12 months). Be careful, some LOA organizations charge fees for unmatured rent.