What is a LOA (lease with option to buy)?
LOA (lease with purchase option): definition
LOA (lease with option to buy) is a contract between two parties: the owner (lessor) of a specific asset grants a second party (lessor) the right to its exclusive possession and use for a specified period and under specified conditions, in exchange for specified periodic rentals or payments.
In the case of a vehicle, LOA (location avec option d'achat) refers to the leasing of a car for a fixed period of time at an agreed rental amount. This type of contract is often used when cash is not available.
- For private individuals, it allows them to drive a new vehicle without having to pay the full value of the vehicle at once.
- Companies opt for this type of contract to relieve their cash flow. Leasing the vehicle smoothes out the initial investment.
The main difference with a classic leasing contract (LLD) is that at the end of the contract (usually 2, 3 or 4 years), the vehicle must be returned to the leasing company or purchased for the residual value.
The residual value of electric vehicles
To know whether to buy back your electric vehicle at the end of a lease with purchase option, you need to look at the vehicle's residual value.
The amount of the purchase option is specified in the lease contract. This amount is generally calculated on the basis of the vehicle's residual value at the end of the contract. The residual value is therefore an estimate made by the lessor or dealer.
Lease with purchase option = Rent * month * current interest rate + residual value
Determining the residual value of a vehicle is no easy task. Projections are largely based on how a given model has retained its value in the past, as well as on the expected demand for the used vehicle. Few electric vehicles two or three years old have a history that allows appraisers to estimate their resale price, which explains some of the high rents for electric car models.
As things stand, it's difficult to estimate the resale price of electric vehicles. There are several reasons for this difficulty in estimating the residual value of electric vehicles:
- a relatively weak track record electric models are recent and there is no real market for used vehicles
- the number ofsubsidies available for the purchase of a new electric vehicle: electric vehicles are subsidized by the French government. These necessary subsidies make the prices of new vehicles often very attractive, encouraging consumers to opt for new electric vehicles rather than used ones.
- range Range: the first electric vehicles had relatively limited ranges. These models are therefore not competitive with new electric vehicles with longer ranges.
LOA (rental with purchase option) in figures
In France, LOA (location avec option d'achat) financed 3 out of 4 new cars in 2018, according to the annual activity report from theFrench Association of Finance Companies. LOA also accounts for half of all used car financing.
The share of LOA in new car financing has risen from 42% in 2013 to 75% in 2018. That's an increase of +13.2% in 2018.
These changes are good news for the automotive sector in France, which can count on LOA (lease with purchase option) to boost sales. These increases are taking place at the expense of conventional credit, which is with French consumers..
Should you buy back your electric car after a LOA?
It's a question we're often asked. As in most cases, we can't make generalizations. The answer will depend on your personal situation.
At the end of your rental contract
If your LOA (lease with purchase option) comes to an end, you have two options: return the vehicle or exercise the purchase option.
Post an ad on free resale sites: Leboncoin for example. The value of a used car is largely based on supply and demand, in relation to its condition and the number of kilometers on the odometer.
Post a detailed ad with all the vehicle's options, several photos and current mileage. In the case of electric cars, it's a good idea to mention the condition of the battery.
Good to know: most manufacturers offer a warranty of several years on electric car batteries. Don't hesitate to mention this in your ad to reassure potential buyers.
Depending on the posted price and the number of requests you receive, you will know whether you should buy the vehicle at the end of your LOA or not:
- If the possible resale price is higher than the purchase option => take the vehicle back and resell it at a profit.
- If the possible resale price is lower than the purchase option => return the vehicle to the dealer or leasing company.
- If the prices are similar => it's up to you to decide whether you want to keep the vehicle or not. It depends on how satisfied you are with the model.
Good to know: when you buy back your vehicle, some of the services included in a LOA (lease with purchase option) are no longer included. For example, you'll have to take responsibility for vehicle maintenance.
You do not wish to pay penalties
A lease with purchase option(LOA) contract is subject to a limit on the number of kilometers you can drive each year. If you don't pay attention to your kilometer quota, you'll often have to pay very high penalties. In this case, it's sometimes a good idea to buy back the vehicle at the price agreed from the outset.
Most contracts have an annual mileage of 10,000 km in France, but it's possible to go further if you drive more.
Good to know: if you drive a lot, you should opt for a long-term lease (LLD) rather than a lease with purchase option (LOA).
Buying an electric car under a LOA (lease with purchase option): your advantages
LOA (lease to own) vehicles offer advantages to both buyers and sellers.
The advantages of LOA (lease with purchase option) for the lessee
- You can drive a new car for as long as you like.
- Monthly lease payments will generally be lower than those of a car loan The lessee pays for use, not possession.
- The lessee doesn't have to worry about the future value of the vehicle, whereas the owner does. For a corporate lessor, there are tax advantages to consider.
- Contract duration and mileage are defined according to the lessee's needs.
- You don't have to spend a lot of money: the first additional rent is around 5 and 15% of the vehicle's sale price.
The advantages of LOA (lease with purchase option) for the lessor
- The lessor retains ownership of the vehicle and can - at the end of your contract - rent it out again or resell it at a profit.
- Since LOA (lease to own) contracts are shorter, they build customer loyalty and generate new contracts more often.
- A substantial and renewed stock of used vehicles, enabling us to resell to markets that are keen on used vehicles.
As you can see, LOA (location avec option d'achat) is on the up and up, enabling more vehicles to be financed in France. If you choose this type of financing, it's worth finding out about the pitfalls to avoid when taking out a contract.
Buying an electric car under a LOA (lease with purchase option): pitfalls to avoid
As you can see, LOA (lease with option to buy) is on the up and up, enabling more vehicles to be financed in France. If you choose this type of financing, it's worth finding out about the pitfalls to avoid when taking out a contract.
Good to know: you have 14 days from signing the contract to retract. You must then contact the lending institution.
The first rent increase
This is the first payment to be made in addition to the first rental payment. This amount is generally high (between 5% and 15% of the vehicle's sale price, or even more for certain contracts).
When you ask for quotes, you need to pay attention to this amount. In fact, we sometimes see offers with very attractive monthly payments, but with very high first rents.
The calculation is quite simple. Let's take an example for a 36-month contract.
- Offer n°1: Rent of €200/month with a 1st rent increase of €8,000
- Offer n°2: Rent of 300€/month with 1st rent increased by 1 000€.
It's the marketing effect, but our brains are going to be more attracted to the first offer. But if we get out our calculator, here's what these figures add up to over 36 months.
- Offer n°1: (€200 x 36) + €8000 = €15,200
- Offer n°2: (€300 x 36) + €1000 = €11,800
It's important to make this simple calculation every time, so as not to fall into the trap of overly attractive offers that will end up costing you more. Likewise, the very principle of car leasing is not to pay too much in advance, which makes offers with higher first rental payments relatively superfluous.
Mileage over the rental period
This is the second very important point to consider. Long-term leasing offers are often subject to mileage restrictions. This mileage is fixed and cannot be exceeded without paying a bill at the end of the contract. The bill can be very high if the mileage is exceeded.
Let's take an example: you have taken out a 10,000 km/year inclusive contract for a 3-year term. At the end of the contract, you've covered 40,000 km instead of the 30,000 stipulated in your contract.
The amount of the invoice at the end of the contract will be the number of extra kilometers covered multiplied by a price per kilometer. This amount is written on your contract when you sign it. Let's imagine that for each additional kilometer, you're billed five centimes, for example.
In this case, the additional amount due will be : (40000-30000)*0.05= 500 €.
If you haven't budgeted for such an expense, you may be penalized when you return your vehicle.
Restoration costs
As a tenant, you are responsible for all maintenance costs.. This is a very important point. When you rent a car, you don't own it. You must therefore return it in perfect condition.
If this is not the case, the owner (dealer or lessor) can demand very high repair costs.
Dealers or leasers often call in professionals to go over every detail of the vehicle. If the vehicle does not meet the leasing company's specifications, the latter may impose repair work that is often over-invoiced and for which you will be charged.
To sum up, before signing up for a LOA (lease with purchase option) contract, you need to read all the terms and conditions carefully. You can negotiate certain terms and conditions, such as mileage or vehicle personalization.
Tip: You should visit a specialist before returning your vehicle, so that he or she can check it over and make any necessary repairs. This will avoid any surprises when you return your vehicle.
LOA (lease to own) car insurance
It's up to you to insure the vehicle when you take out a lease with purchase option, even if you don't own it. You have the option of insuring the vehicle with the insurer of your choice, but the lessor may require you to take out a contract with more extensive coverage.
For peace of mind, we advise you to take out comprehensive insurance for all LOA (lease to own) contracts.
Buying an electric car under a LOA (lease with purchase option): putting together your file
You've chosen your future car, compared the offers and found a contract that suits you. Now it's time to start putting the paperwork together.
The file you put together will be sent to the dealer's or lessor's financing organization.
What documents do private individuals need to provide for a LOA?
- A copy of your last three pay slips. If you are retired or self-employed, you will be asked for your last one or two tax notices.
- A copy of your valid identity card or passport.
- Proof of address less than 3 months old. This can be a gas, electricity or telephone bill (even a cell phone bill), a rent receipt or a property deed.
- Bank details (RIB).
What documents do entrepreneurs and professionals need to provide for a LOA?
- A copy of your last three pay slips. If you are retired or self-employed, you will be asked for your last one or two tax notices.
- A copy of your valid identity card or passport.
- Proof of address less than 3 months old. This can be a gas, electricity or telephone bill (even a cell phone bill), a rent receipt or a property deed.
- Bank details (RIB).
What documents do companies/legal entities need to provide for an LOA?
- A copy of both sides of the CEO's or managing director's valid ID (national identity card or passport).
- An extract from K-Bis
- Bank details (RIB).
- Part of the balance sheet (Sheets 1 to 8 + 11) or 2031/2035
- The identity and contact details of the company's chartered accountant.
- Articles of association
After studying the file, there are three scenarios:
- Agreement: your application has been accepted. Congratulations, you can now sign the purchase order and order your vehicle.
- Additional documents are required: in some cases, the financing organization may ask you for additional guarantees.
- Refusal: the application is refused. You can try again or opt for another financing method.
When can a LOA (lease with purchase option) application be refused?
The file may be refused for the following reasons:
- Insufficient income (your debt ratio is too high)
- History of non-payment
- File registrations
- Overindebtedness
- Poor Banque de France rating (companies)
- Not enough balance sheets (companies)
Why lease your electric car?
There are several advantages to buying an electric car under a LOA (lease with purchase option).
- Better control of your budget - An electric car is initially more expensive than a combustion-powered car. The initial investment quickly pays for itself, but some models are still more expensive than their combustion counterparts. Buying an electric car under a LOA (lease with purchase option) allows you to smooth out the initial investment and drive an electric car without breaking the bank.
- Enjoy the benefits of electric cars - The cost of maintaining an electric car is very low. What can be very expensive with combustion engines won't cost you much with an electric car. For example, oil changes are no longer necessary. What's more, the clutch and brake pads are less stressed thanks to the energy recovery system.
This is a major advantage when buying an electric car under a LOA (lease with purchase option).
- Be sure you're getting a good deal - One of the advantages of buying an electric car under a LOA (lease with option to buy) is that you don't have to worry about the residual value of your electric car. If you buy your electric car under a LOA (lease with option to buy) and you don't like the resale price, simply return it. All you have to do is buy a new model from your dealer at the end of your contract. If the resale price is higher than your purchase option, you can buy the electric car back.
In conclusion
The LOA (lease with option to buy) is an ideal solution for buying a new vehicle if you don't want to invest a large down payment. It also allows you to smooth out the price over several months and manage your budget more effectively. As with any contract, it's important to pay attention to the details and to compare offers before signing.
Buying your electric car under a LOA (lease with option to buy) is a very good option once all the little contractual details have been taken care of.
There's another situation that could persuade you to buy the vehicle: if it's in poor condition. In leasing the vehicle to you, the dealer or lessor wants you to get back a vehicle in impeccable condition. If this isn't the case, you'll have to buy the vehicle and probably do some work to restore it, at your own expense. You can then resell it or keep it for yourself.
That's it! Now you should be able to decide whether to buy or lease back your vehicle.
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