What solutions to finance the purchase of your car?

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

If the car still occupies an important place in the daily life of the French, in recent years there has been a major change: the rent, either long-term (LLD) or with option to purchase (LOA) is scaled in to the detriment of the traditional acquisition financed in cash or with a car loan. However, the operation may be more expensive than expected. Explanations.

The rent is on the rise

For a long time reserved for corporate car fleets, the lease – which comes from the English “To lease”, ie “wash” – has returned to normal. In 2021, this solution was chosen by individuals in 47% of cases (1). Renting rather than buying can be done according to two types of formulas: long-term renting (LLD) or purchase with option to purchase (LOA).

– Long term rental (LLD):

This is a rental car for a defined period, averaging between 24 and 48 months, in exchange for paying a monthly rent. The long-term rental agreement (LLD) provides for the 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 option to purchase (LOA):

The principle is the same as for long-term rental (LLD) except that at the end of the lease, the individual can activate a repurchase option for the vehicle that has been rented so far. The possible refund price is set at the time of signing the contract and this amount is deducted from the rents paid under the rental portion of the contract.

When signing a lease with option to purchase (LOA), the individual must more often pay a larger first rent, as a contribution. If at the end of the contract you activate the call option, this contribution will be deducted from the remaining outstanding capital. If you decide to return the vehicle, this contribution will be refunded. In addition, Rental with Option to Purchase (LOA) does not provide for the 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 legally links the rent with option to purchase (LOA) to a consumer credit, which entitles the consumer to a withdrawal period of 14 days from the signing of the contract.

Beware of hidden rental costs

On paper, renting has several advantages:

– The person can test a vehicle model for several months

to see if it meets your needs.

– The car is regularly renewed.

– Costs are in theory under control

as both LOAs and LLDs are financed each month in the form of rents with a priori more affordable monthly payments than the monthly payments of a consumer loan.

However, the calculation is not so simple because in fact several costs are added during the life of the lease and end up significantly increasing the final bill:

  • Mileage:

    The LOA and LDD contract provides for a maximum number of kilometers, for example 20,000 km in 24 months. If the driver exceeds this kilometer limit, he will have to pay penalties for each additional kilometer traveled, in the order of 0.05 to 0.40 euros depending on the company. Therefore, it is best to be sure that you can reliably estimate the distances you will travel in the coming months.

  • Vehicle wear:

    When you return the vehicle at the end of your lease, it must be in a state known as “normal wear and tear,” that is, no scratches, stains, bodywork, etc. Otherwise, the driver will be subject to additional repair costs.

  • Early termination:

    A lease commits the driver for a certain period. If you wish to break this commitment before the end of the contract, you may be subject to penalties.

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

  • No nasty surprises:

    you drive as many miles as you want and 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. Then you can enjoy it for many years without paying any more drafts or reselling it.

  • Overall cost:

    the amount of monthly payments is often less than that of a consumer loan, but ultimately, a lease is more expensive than a car loan.

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

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

For rent with option to purchase (LOA):

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

For automatic credit:

the possible contribution + the amount of the monthly car loan installments multiplied by the duration of the contract. In this way, you can compare the total cost of the two devices with each other but also with the initial price of the car.

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

Stephanne Coignard ([email protected])

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