The traditional way to buy something on credit is through UCC Article 9.
But there’s another way: a Lease purchase agreement.
The LPA is a worse deal:
- The buyer doesn’t own the property until the end of the payments, rather than the beginning.
- Leases aren’t subject to usury laws.
- The buyer doesn’t have the post-default rights after property is repossessed. This is important, because in a real installment purchase agreement, the buyer gets equity in the property as he pays it down, and that equity is protected by the UCC. No so in a lease purchase agreement. In a traditional credit sale, the repossessing creditor must dispose of the collateral and give the buyer credit for the value of the goods. Credit Sale Example: Buyer owes $4,000 on a car. Car is worth $10,000. Car gets repossessed and sold for $8,000. The Creditor must pay the buyer for his $4,000 of realized equity. Lease Purchase Example: Buyer has $4,000 of remaining lease payments on a car. Car is worth $10,000. Car gets repossessed and sold again for $8,000. Buyer gets nothing. So as you can see, the LPA example gives the creditor $4,000 of free money. And what corporation doesn’t like getting free money from poor people?
- In Bankruptcy, the buyer has to either pay the remaining payments as they come due or lose the property, Which is different from a normal sale because that allows the debtor in BK to spread the cost of the balance out over up to 5 years. This can make the difference between being able to afford to keep one’s important belongings and losing everything.
Now most lease-purchase agreements are really accomplishing the same thing as a purchase-sale agreement: selling property and getting interest payments over time. But they give the buyer a crappier deal, so naturally there are some businesses who prefer lease-purchases.
But when they first came out, several courts, especially bankruptcy courts, saw right through the scheme and said “No, these aren’t true leases, but just disguised purchase sale agreements. You have to treat your Lease-purchase buyers the same as you treat credit-salebuyers.”
Their grand ripoff scheme was exposed! Now they would have to – gasp! – treat struggling purchasers fairly. So they did what corporations always do when a court tells them to treat people fairly: they started sending money to politicians to convince them to change the law.
The rationale is always the same: if we’re not allowed to rip people off, then we’ll be forced into bankruptcy! Our workers will lose their jobs, our CEOs will have to find something else to do, and the people who need it most – the low income working people – won’t be able to buy our products.
In Alabama, like in many places, they found enough sufficiently corrupt legislators to take their money and pass the law that they wrote.
So the wrote the law they wanted and paid legislators to pass it. They created a solution without a problem and turned it into a law. You can find it in the Alabama Code, at Ala. Code 8-25-1.
Like many such laws, this one is a wolf in sheep’s clothing. It purports to be a consumer protection statute designed to “clarify” the law, but no clarification was required before it was passed back in the 1990s. The real purpose behind the Alabama Lease Purchase Agreements law is to protect the big businesses that want to be able to take loads of money from the working poor and leave them with nothing if they wind up unable to make their final payments.
Under current political conditions in Alabama, there is about a zero percnet chance that someone in Montgomery will change the current system, so the lesson for us all is this: Don’t enter a lease-purchase agreement! Find someone who will sell you something the old-fashioned way.