4 months ago
In light of the current economic crises, many individuals may find it difficult to bear the cost of purchasing a private car, leading them to opt for a lease-to-own or lease with the option to purchase. This method, prevalent in the United Arab Emirates due to its ease and widespread availability, is one of the key options that assist citizens in acquiring their own vehicles. Many companies and banks offer this service without an initial payment or additional fees.
How does the lease-to-own system without an initial payment benefit consumers? What are its conditions and advantages?
The lease-to-own system is a financial arrangement that allows consumers to acquire a vehicle through a lease contract, paying a series of monthly installments to the lessor. At the end of the lease term, the vehicle is transferred to the consumer for a pre-agreed amount.
Lease-to-own vehicles without an initial payment allow consumers to acquire a car without a large upfront payment. Instead, they pay in installments over a specified period, and at the end of the lease, they can purchase the asset at a pre-determined price. This enables them to obtain goods that might be beyond their current financial capacity.
Key advantages include:
Lower Installments Compared to Traditional Loans: Lease-to-own installments are typically lower than traditional loan installments because the cost of the asset is spread over a longer period, depending on the asset’s value, its expected life, lease term, and the profit margin set by the lessor, along with applicable taxes and fees. The monthly payment is lower due to the presence of a final payment.
Taxes and Maintenance: Taxes and routine maintenance for lease-to-own vehicles are generally not the responsibility of the lessee if there are issues with the vehicle itself. The lessor is usually the legal owner during the lease period, thus responsible for paying ownership taxes, annual registration, and maintenance services.
Early Return Option: If payment difficulties arise, the vehicle can be returned because the lessee is not the legal owner during the contract period. This differs from traditional vehicle financing, where the client becomes the owner and cannot return the vehicle without incurring significant losses. This feature provides added flexibility for lessees in cases of financial hardship.
Purchase Clause:
The lease-to-own contract must include a purchase clause at the end of the term, which includes:
Installment Value:
In the lease-to-own system, the installment value is based on the vehicle’s price and the contract duration. Initially, the expected value of the vehicle at the end of the lease term is determined, and this value is divided by the number of monthly installments. A down payment is made before the contract starts, followed by monthly payments until the vehicle’s total value is covered. At the end of the contract, the lessee has the option to purchase the vehicle at a pre-determined price, which is typically lower than the vehicle’s actual price at that time.
Contract Duration:
The lease-to-own period typically ranges from 3 to 5 years, depending on the lessee’s preferences and the terms agreed with the lessor. Extending the contract period directly affects the monthly installments, with longer periods resulting in lower monthly payments, and shorter periods resulting in higher payments.
Installment Schedule and Amount:
The contract should include a schedule detailing the timing and amount of payments. This schedule outlines the amounts to be paid monthly by the lessee, helping to clarify each party’s obligations and ensuring no confusion or misunderstanding about the installment payments.
Lessee’s Adherence to Contract Terms:
The lessee must adhere to all contract terms, including restrictions on selling or leasing the vehicle for purposes not agreed upon. The lessee is also responsible for maintenance costs if the damage results from use.
Formal Notification: The lessee should notify the lessor of the intent to return the vehicle by phone or email and request approval through a formal request detailing the vehicle’s information and contract details.
Comprehensive Inspection: The vehicle should be inspected thoroughly before return to ensure no damage or wear. Any personal additions or modifications should be removed, such as audio systems or decals.
Documents and Paperwork: All related documents should be retained and presented to the lessor, including:
Returning the Vehicle: In a lease-to-own system, a receipt or written acknowledgment from the lessor confirming the vehicle’s return should be obtained. This receipt acts as official proof of return and should include:
Expected Penalties for Contract Termination: It is advisable to inquire about any potential costs or penalties for early contract termination. These costs vary based on the contract terms and lessor’s policies but often include early termination fees proportional to the remaining contract period and vehicle value. Some companies might also impose additional costs reflecting the expected depreciation of the vehicle. Reviewing the contract terms carefully and inquiring about potential costs can help avoid surprises.
The final ownership of the lease-to-own vehicle transfers to the lessee after full payment of installments. The lessee must complete all payments as per the contract schedule, after which the lessor will issue a title certificate in the lessee’s name. The vehicle’s ownership is officially transferred to the lessee at the traffic department. After this transfer, the lease-to-own contract ends, and the vehicle becomes the lessee’s property. The lessee will then be responsible for insurance, registration, and usage of the vehicle.