The LOA or Rental with Purchase Option is a fairly opaque consumer credit. Indeed, it is the only car credit formula for which banks and financial organizations are not obliged to communicate on the APR rate. But it’s not the only thing hidden from the customer. With an LOA, here are the prices which are not specified:
- The car loan APR rate of financing during the rental period
- The price of optional but often “imposed” maintenance
- The price of any guarantees (assistance, parts and labor)
- The cost of restoration at the time of any recovery
Because beyond the financing price which is opaque, as all the costs are monthly, we do not know the full price of each service. So certainly, paying for example 200 $ / month for a new car in LOA can be very attractive but in the end do we really get a good deal?
As a reminder, when financial organizations offer revolving credit, they generally highlight a small monthly payment from $ 20 / month and not the revisable taeg rate around 20%!
LOA business principle
Leasing with option to buy is a car finance service rather focused on new vehicles, even if you start to find used car LOA. The principle is to offer the customer to take back his car after a certain period of use. But if the client wishes, he can keep the car for a certain amount. With the LOA, we are therefore supposed to pay only for the use but with the possibility of becoming an owner.
This is the difference with LLD, long term rental. With this type of financing, at the end of the contract, it will not be possible to buy back the vehicle. Rents are definitely lost while with the LOA, you can choose whether or not to buy your vehicle at the end.
To make a rental with an option to buy, the law on credit provides essential data. But not communicating an auto credit rate. It is an aberration but it is like that. No doubt better to hide what not to see. Difficult nevertheless to find the cheapest car loan in this case… The other data must be mentioned on the contract. The main information to calculate the interest (or not) of the rental are:
- Cash purchase price of the leased vehicle
- Duration of the LOA (generally 2, 3 or 4 years)
- Amount of the takeover option
- Amount and number of rents
Overall we did the calculations in our LOA, auto credit and LLD survey and the conclusion is clear. The cheapest is auto credit. LOA can remain an interesting service for those who are ready to pay for not having to manage the resale of the car. But this “service” comes at a significant price. Especially since there are other points on which we must remain vigilant so that the LOA does not become very expensive.
The dangers of renting with option to buy
With LOA, there are a number of points to which special attention must be paid. Almost all come from the fact that it is a monthly approach, one has the impression of a cheap car loan. But it can be quite the opposite. Our opinion on the LOA highlights the main points of vigilance about it.
Cash purchase price : When buying a vehicle, discussion of the price is the most important negotiation. But in a rental with option to buy, we tend to minimize it. However, you can lose a lot of money by neglecting the negotiation on the price of the car.
LOA rate : there is not necessarily, we are not going to negotiate. Whereas with a loan, we would naturally have compared the rate of car credit…
Amount of the first rent : this is one of the major points on which we must be vigilant. Especially if you don’t buy the vehicle at the end. In this case, all rents will have been paid at a loss. The first rent can often be increased. Unlike the LOA without contribution, when a first rent is increased, this allows the financial institution and the concessionaire to post small rents.
Amount of the call option : in the same way, the call option is supposed to represent the trade-in value. However, it is difficult to predict a market value at 2 to 4 years of a new car. By overestimating it a little, we can also lower the monthly payment posted while not encouraging the customer to buy back his purchase option of his LOA.
Rent amount : what does it really contain? Is it only dedicated to financing the use of the vehicle? In any case, when the car salesmen communicate on an “all inclusive” monthly payment, it is generally good that we add maintenance and assistance and insurance. So beware of knowing exactly what you are paying for. In the LOA contract, the law provides for rent for the LOA and not for other services normally…
Resumption of the vehicle : We can only invite the greatest caution on the costs of reconditioning following an auto LOA or motorcycle LOA. There is not necessarily one but it will be better to have made a thorough tour of the car before. Even if it means spending a bit of body renovator yourself. Otherwise, the bill can be salted.