Borrowing capacity, income and budget
I have a car loan or a car lease with purchase option running: should I pay it off before buying?
Paying off a car loan or a lease with purchase option frees up capacity but eats into the deposit. How to weigh it up, and when to pay off nothing.
Paying off a car loan or a lease with purchase option before a mortgage frees up borrowing capacity but eats into the deposit: the trade-off is calculated. Paying off usually wins when few instalments and little outstanding capital remain, and loses on a recent loan. A lease with purchase option, whose rent counts as an instalment, generally costs too much to leave mid-contract.
By Sandy MASCART, mandataire d'intermédiaire en opérations de banque et en services de paiement ORIAS 26000541 sous le mandat de CDV PATRIMOINE & ASSURANCE (ORIAS 14005573)
Key points
- A lease with purchase option is not legally a loan, but its monthly rent counts in full in the debt-to-income ratio, like a repayment loan instalment.
- Paying off a loan gains borrowing capacity but reduces the deposit by the same amount: the trade-off is calculated, never decided by instinct.
- A loan close to its end weighs in the calculation like a recent loan; some lenders disregard the charge on the strength of the repayment schedule.
- The early repayment penalty on a consumer loan is capped by law and can never exceed the interest still due.
- Leaving a lease with purchase option mid-contract usually costs the remaining rents and the residual value, which makes the move a losing one in most cases.
Paying off a car loan or a lease with purchase option frees up borrowing capacity, but uses up deposit. Three figures decide: the instalment freed, the outstanding capital, the end date of the contract.
On consumer credit, see the pre-contractual information (FR) and what falls outside my remit.
Does a lease with purchase option count as a loan in the bank's calculation?
Yes: its rent counts in full in the debt-to-income ratio, like a loan instalment.
Critère d'octroi imposé aux établissements par le Haut Conseil de stabilité financière. Toutes les charges d'emprunt entrent au numérateur.
- En vigueur depuis le
- Source
- Décision D-HCSF-2021-7, art. 1er — Légifrance
Long-term leasing is treated the same way. A cash reserve worries a lender by its mere existence. The bank reads:
- The rent or the instalment.
- The end date of the contract.
- The regularity of the direct debits: one rejected payment weighs more than the rent.
Pay off or keep: the four-step method
Compare the capacity gained by the instalment freed with the capacity lost through the smaller deposit.
- Note the exact instalment, insurance included.
- Ask for the early repayment statement: outstanding capital and penalty.
- Work out the capacity gained with the instalment formula, run backwards.
- Work out the capacity lost: redo the plan with the deposit before and after, all purchase costs included.
A loan that ends in less than a year
It weighs as much as a long loan. Attach the repayment schedule that shows the last instalment: some banks disregard the charge. Otherwise, paying off almost always wins.
How much does early repayment of a consumer loan cost?
The penalty is capped according to the time remaining: the cap is halved at one year or less from the end.
- No penalty below a threshold set by decree.
- The percentage applies to the amount repaid, not to the initial capital.
- The penalty never exceeds the interest still to run.
These caps apply within the scope of consumer credit:
200 € ()A lease with purchase option follows its contract: remaining rents plus residual value, almost always far more expensive.
What to do when the lease cannot be paid off at a reasonable cost?
Transfer the contract if the clause allows it, hand the vehicle back, or declare the charge and offset it with the loan term or the deposit.
A documented charge goes down better than a charge discovered on the statements: see the mistakes in a first file.
Enveloppe collective mesurée en montant sur la production trimestrielle de chaque établissement. Aucun emprunteur ne peut la revendiquer.
- En vigueur depuis le
- Source
- Décision D-HCSF-2021-7, art. 2 — Légifrance
See the debt-to-income rule and its exemption margin.
Lease running: should it be paid off before applying for the loan?
Only if leaving it costs little compared with the capacity freed.
- End of contract: pay it off, it wins.
- Mid-contract: calculate; keeping it often comes out ahead.
- Recent lease: keep it, document it, offset it.
Keep a record of any payoff: statement, transfer, closure certificate. See what the bank looks at, and in what order and what the deposit really pays for.
Statement in hand? Create your file or have both scenarios compared by phone.
Regroupement de crédits
Un regroupement de crédits dont la part des crédits immobiliers ne dépasse pas 60 % du montant total de l’opération relève du crédit à la consommation (C. consom., art. L. 314-10, L. 314-11 et R. 314-18). Le code impose alors la mention suivante sur sa publicité :
Un crédit vous engage et doit être remboursé. Vérifiez vos capacités de remboursement avant de vous engager
Sources
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