Over the past fifteen years, vehicle leasing, previously known as “leasing”, has become so popular that it has now accounted for three-quarters of vehicle purchase financing (2017). This enthusiasm reflects a new way of consumption that now favours use over ownership.

Long-term vehicle rental with purchase option: Between credit and rental

More commonly known as LOA, leasing with a purchase option consists of leasing a new or used vehicle over a long period of two to five years (or even seven years), according to a defined mileage with the possibility for the customer, at the end of the lease contract, to buy the vehicle at a price determined in advance. The user has the vehicle he has chosen purchased by a bank such as Crédit Mutuel or a financial institution that retains ownership of the vehicle he rents to him for a contractually determined monthly rent. Online banks also offer this formula, which is similar to that of a consumer credit. This long-term rental solution is attractive for motorists who like to change vehicles regularly and wish to relieve themselves of the constraints and hazards of resale. The LOA is intended only for individuals and the use of the rented vehicle is considered outside any professional activity.

A rental with or without an initial contribution

Long-term vehicle rental with purchase option can be finalized with or without an initial contribution. An initial contribution called “1st rent” of approximately 15% of the value of the vehicle (it must not exceed 25%) may thus be required at the time of signing the rental contract. If the driver does not wish to purchase the vehicle at the end of the contract, this security deposit will be returned to him. Otherwise, it will be deducted from the outstanding balance on the vehicle.

LOA, LDD, Lease Credit what are the differences?

This formula remains close to that of long-term rental (LDD) or Leasing reserved for professionals, but with some major differences:

In the case of LDD

The vehicle can be used for professional purposes.

The purchase of the vehicle is not scheduled at the end of the contract. The SDA therefore does not allow the driver to become the owner of the vehicle.

Car insurance, maintenance or assistance services are included in an LTD, which is not the case (with a few exceptions, as some dealers provide car insurance included) in the LOA contract. The user of a leased vehicle with an option to purchase is therefore required to insure himself. If he wishes to have the vehicle serviced and assisted, the monthly payments will be subject to an increase.

In the case of Leasing

This form of rental, which, like the LOA, provides for the purchase of the vehicle at the end of the contract, only concerns companies regardless of their legal status and users acting in the context of their professional activity.

LOA, many advantages but also disadvantages

Among the assets that have contributed to the success of LOA are

The ease of regular vehicle renewal. Thanks to this flexible formula, the consumer benefits from an ever-new vehicle equipped with the latest innovations in the automotive industry.

The tenant defines the duration of the contract and the mileage

The possibility of reducing monthly payments.

The amount of monthly payments remains lower than that of a traditional car loan because the user pays for the use of the vehicle and not for his property. The amount of the rent is therefore calculated on the value of the vehicle throughout the term of the lease, which is equivalent to approximately 50 to 80% of its replacement value. These advantageous rates appeal to people who want to have a beautiful vehicle despite their low repayment capacity. They often take advantage of a model that they could not have acquired with a traditional loan.

Some constraints to know

The main constraint of the LOA is the limited annual mileage provided for in the contract. The fixed price is, it is true, expressed in kilometres per year but will be examined over the total duration of use when the vehicle is returned. Exceeding the mileage can be costly. It is therefore advisable in case of doubt about the medium-term needs to opt for a low mileage that can be increased if necessary. Therefore, preference should be given to contracts that provide for the possibility of changing the mileage (and therefore the monthly payments) at least once or twice during the rental period free of charge.

The user of the vehicle is responsible for the vehicle even if he does not own it.

At the end of the rental period, the vehicle must be returned in good condition, “in good family manners”. Failure to do so will result in penalties for the user.

In the event of theft or destruction of the vehicle, the insurance indemnity will be paid directly to the rental company and not to the user. The insured will therefore find himself without a car with monthly payments to be paid on the residual value of the vehicle minus the amount of compensation paid by the insurance. In other words, the sooner the loss occurs after the contract is signed, the higher the amount to be paid to the lessor.

At the end of the contract, the user will pay more to buy the vehicle than if he had acquired it on credit from the beginning.

The absence of an indication of an annual percentage rate of charge (APR) in a LOA contract makes it difficult to compare it with a traditional credit offer. If we add to this the various additional services (maintenance, insurance, etc.) it is generally impossible to estimate the real cost of a LOA operation.

It is not always advantageous for insurance to be included in the contract (if this is the case). Competing and choosing a more competitive insurer can result in substantial savings.

At the end of the LOA: purchasing solutions

In the case of a lease with a purchase option, three options are possible:

Advance purchase

The vehicle can be purchased before the end of the lease (if the contract so provides) subject to a minimum lease period of generally 12 months. Please note that the bank may charge fees for rent not yet due.

The purchase at the end of the lease

The vehicle can be definitively purchased by the lessee who will pay the lessor the amount corresponding to the residual value of the car previously mentioned in the contract (less the security deposit paid at the beginning). To pay the amount of the redemption, the user can take out a loan from the LOA’s financial institution, his bank, another banking institution such as Creditmutuel or an online bank.

The user does not wish to purchase the vehicle

In this case, he does not have to deal with the resale of the vehicle. Any security deposit paid at the time of subscription is returned to him by the lessor subject to the good condition of the car and compliance with the mileage flat rate. The deposit can also be carried forward as a contribution to a new LOA contract.

Changing cars or drivers during the rental period

Looking for a more economical, spacious vehicle etc? The LOA contract precisely defines the leased vehicle, which, a priori, does not justify a change of model during the contract. However, some contracts provide for this possibility with the possibility of terminating the contract at the end of the term, allowing the driver to rent another one. If this is the case, the driver will have to pay penalties for early termination mentioned in the contract. Depending on the case, they can be significant. It is also possible to transfer the contract to a new tenant or to have the contract repurchased by another car dealership.

The identity of the parties

The date and duration of the offer

The designation of the rented vehicle and its actual value at the time of rental

The reimbursement terms including the rental fees (car registration, ecological sticker, insurance if provided for in the rental…)

The amount of the security deposit

The number and amount of monthly payments (or other rental frequency)

The residual value of the vehicle, i.e. the repurchase value at the end of the lease in the event of a repurchase of the property.

The total cost of the transaction (i.e. the total price of the rents including tax plus the cash value and the amount of any insurance taken out). As it is a rental and not a traditional loan, the mention of an interest rate is not mandatory.

The tenant has a right of withdrawal of 14 days after the signature of the LOA contract.