What solutions to finance your car purchase?

How to best finance the purchase of a car? (Photo credits: Pixabay – Rate Buy)

If the car still has an important place in the daily life of the French, a major change has taken place in recent years: the rental, whether long-term (LLD) or with option to buy (LOA), takes the scale to the detriment of the traditional acquisition financed in cash or by a car loan. However, the operation may prove to be more expensive than expected. Explanations.

Leasing is on the rise

Long reserved for company car fleets, leasing – which comes from the English “To lease”, ie “clean” – is now back in custom. In 2021, this solution was chosen by individuals in 47% of cases (1). Renting instead of buying can be done according to two types of formulas: long-term rental (LLD) or rental with an option to buy (LOA).

– Long Term Rent (LLD):

This is a car rental for a defined period, on average between 24 and 48 months, against payment of a monthly rent. The long-term lease (LLD) usually provides for maintenance as well as assistance and repair of the vehicle in the event of a breakdown. At the end of the contract, the vehicle is returned to the landlord.

– Lease with purchase option (LOA):

The principle is the same as for long-term lease (LLD) except that at the end of the lease the individual can activate an option to repurchase the vehicle he has leased until now. The possible redemption price is determined at the time of signing the contract and the tenants paid within the framework of the rental part of the contract are deducted from this amount.

When concluding a lease with a purchase option (LOA), the individual usually has to pay a larger first rent, as a contribution. If he activates the call option at the end of the contract, this contribution will be deducted from the remaining overdue capital. If he decides to return the vehicle, this contribution will be refunded to him. In addition, Rent with the option to purchase (LOA) does not provide maintenance, assistance or repair of the vehicle. Some rental companies offer to include these options, but this significantly increases the amount of monthly payments.

Good to know: the fact that it contains a purchase clause, the lease with purchase option (LOA) legally links to a consumer credit, which gives the consumer the right to a withdrawal period of 14 days from the signing of the contract.

Beware of the hidden cost of leasing

On paper, leasing has several advantages:

– The individual can test a vehicle model over several months

to see if it meets your needs.

– The car is renewed continuously.

– The costs are in theory under control

as LOA as LLD is financed each month in the form of rents with monthly payments a priori more affordable than the monthly payments of a consumer credit.

However, the calculation is not so simple because more costs are actually added over the life of the lease and end up increasing the final invoice significantly:

  • Mileage:

    The LOA and LDD contract provides a maximum number of kilometers, for example 20,000 km over 24 months. If the driver exceeds this mileage limit, he must pay fines for each additional kilometer traveled in the range of 0.05 to 0.40 euros depending on the company. It is therefore better to be sure that you can reliably estimate the distances you will cover in the coming months.

  • Vehicle clothing:

    When he delivers the vehicle at the end of his lease, it must be in a condition called “normal wear and tear”, ie without scratches, stains, shocks on the body, etc. Otherwise, the driver will be subject to additional repair costs.

  • Early termination:

    A lease commits the driver for a fixed period. If he wishes to breach this obligation before the expiry of the contract, he may be fined.

To finance the purchase of a car, consumer credit has several arguments in favor:

  • No unpleasant surprises:

    you drive as many kilometers as you want and you are responsible for both the maintenance of your vehicle and its repair in the event of an accident.

  • Capitalization:

    each draft allows you to capitalize, and at the end of the car loan you own your car. You can then enjoy it for many years by not paying more features, or reselling it.

  • The total cost:

    the size of the monthly payments is often lower than for a consumer loan, but in the end, a lease is more expensive than a car loan.

How do you compare the cost between a LOA and a car loan?

If you want to establish a factual comparison of the cost of a LOA versus a car loan to decide which system to choose to become a vehicle owner, you need to add up the following expense items:

For rent with purchase option (LOA):

the possible contribution + the size of the call option + the amount of the monthly payments of LOA multiplied by the duration of the contract.

For automatic credit:

the possible contribution + the size of the monthly car loan payments multiplied by the duration of the contract. This way you will be able to compare the total price of the two units with each other but also with the starting price of the car.

(1) Why car manufacturers no longer want to sell cars, 03/05/2022, Les Echos.

Stephanne Coignard (redaction@boursorama.fr)

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