Initial Payment and Payment Profiles is very simple once you get it – but is quite difficult to explain.
So for those who need it, here is our simple guide to help you understand.
Firstly and very importantly the initial payment is just that “an initial payment”. It is not a down payment, it is not a deposit and it is not returned to you at the end of the lease period.
The initial payment is the first payment you make to the finance company and is part of the total amount payable, nothing more, nothing less. The initial payment reduces your bill.
If the total cost of a lease is £5,000 and your initial payment is £500 then the balance is £4,500.
This is where some people get confused. With the type of lease that we sell most contract hire the total amount payable is the same regardless of what payment profile or payment type you use to get there. This is because Contract Hire does not have an APR. When your quote is calculated approximately 95% of the rental is the vehicle depreciation. The other 5% is the profit retained by the finance company and our commission. The vehicle’s predicted future value [residual value] is calculated in the quotation.
The profit that the finance companies make from lease cars is probably not as much as you think and the risk can be very high. If used car values suddenly slump then the finance companies can find themselves with thousands of vehicles that are worth less than they initially predicted and this can lead to significant losses. Luckily with the type of leasing we offer you bear none of the risk of market forces.
1. Terminal Pause
A terminal pause profile is when you pay so many monthly payments in advance. One of which is counted as your first rental and the others are counted as your last rentals. For example if you took out a terminal pause 36 month lease that cost £200 per month – You pay 3 months in advance = £600. Of the 3 in advance payments one is your first months payment and the other two are the last two months payments. This is commonly known as a 3+33 payment profile. You do not make a payment for the last 2 months of the lease as you have paid in advance.
You could pay more or less rentals in advance. If you paid 6 rentals in advance, your first payment is covered and your last 5 payments are covered. The payment profile is 6+30 on a 36 month lease. If the lease was 24 months then the payment profile is 6+18.
With a terminal pause lease the amount of payments equals the amount of months the lease is over. e.g 6+30 = 36 months, 1+35 = 36 months, 9+15 = 24 months, 3+21 = 24 months, 12+36 = 48 months, 6+42 = 48 months, etc…
With a terminal pause it doesn’t matter how many rentals you pay in advance you will not reduce the monthly payments.
2. Spread Rental
A spread rental is the most common payment profile as it can be better customised to suit a customers budget plus it can make the payments appear cheaper whereas in fact you are paying the same total amount as a terminal pause.
With a spread rental you pay a lump sum in advance. It is usually the equivalent of a certain amount of monthly payments. For example if the sum of 3 months is paid in advance on a 36 months lease the payment profile is called 3+35. 6 in advance = 6+35, or you could have 9+35, 12+35 and 4 years could be 3+47, 5+47, 9+47, and so on.
The difference with a spread rental is that rather than paying off the last payments with the initial payment you are reducing the balance over the remainder of the lease period. So if the total cost of a 3 year lease is £7,200 (£200 per month) and you pay 6 in advance (6 x £200 = £1200) leaving a balance of £6,000 which is paid over the remaining 35 months. £171.43 x 35 monthly payments = £6,000.
If you take the same total balance of £7,200 and lease with a 9+35 payment profile, The initial payment is £1,472.73 followed by 35 monthly payments of £163.64. So you can see that by paying more up front you pay less monthly, but the total remains the same.
Example of Terminal Pause v Spread Rental
New VW Golf 1.6TDi SE 5 Door Manual – 48 months lease, 6 payments in advance – Total amount payable £10,000
Terminal Pause = £10,000/48 [6+42] = £208.33. Initial payment 6 x £208.33 = £1,250 followed by 42 monthly payment of £208.33.
Spread Rental = £10,000/53 [6+47] = £188.68. Initial payment 6 x £188.68 = £1,132.08 followed by 47 monthly payments of £188.68
So whilst both examples lease the same vehicle over the same period the payments are significantly different.
What is 6+47? It is a spread rental over 48 months with the equivalent of 6 rentals in advance followed by 47 monthly payments.
What is 9+23? It is a spread rental over 24 months with the equivalent of 9 rentals in advance followed by 23 monthly payments.
What is 3+33? It is a terminal pause rental over 36 months with the equivalent of 3 rentals in advance followed by 33 monthly payments.
3. Zero Deposit
I don’t much like the term “Zero Deposit Leasing” as it suggests that the payment is a deposit, whereas it is not. However, the phrase is far too popular and life too short for me to try and eradicate it.
Zero deposit is simply a lease where you pay one month in advance instead of 3, 6 or 9. It is neither a terminal pause or a spread rental. If the lease is for 36 months, the profile is 1+35, you pay monthly in advance but nothing else.
No deposit lease is very popular as the user is keeping hold of their money rather than giving it to the finance company to look after. The only downside to a low initial payment is that the risk to the finance company is greater and they may not accept your application or may offer the lease with a larger initial payment instead.
The best payment profile is the payment profile that suits you best. Whether you prefer to pay more per month and not the last few months or prefer to pay as much as is needed in advance to reach your monthly budget. With leasing comes the flexibility to cater for individual needs.
- If you have a very good credit score – pay as little as possible up front. The money is always better in your bank that the finance companies bank.
- Are you are unsure about your credit status and think that you might be a borderline case? By applying with higher initial payment you are reducing the risk. The finance company is more likely to accept your application.
- No good at saving? With Terminal pause you pay some of the last payments in advance. You can use this gap in payments to save your next initial payment.
- For the cheapest monthly lease payment a spread rental is the way to go and is the most common method.