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Capital Equipment Finance > Asset Finance > Hire Purchase
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What is hire purchase?

Hire purchase (HP) is a form of asset finance and works as its name suggests – you essentially hire the asset over the contract period, owning it at the end of the agreement.

This works in a similar way to a personal loan, however the finance company pays the dealer on your behalf on day one; with you making payments until the balance is cleared.  At the end of the pre-agreed period, you exercise an option to purchase and you own the asset.

The finance company uses its ownership of the asset as security against the loan (like a mortgage) This security can mean it’s easier to get than normal loans.

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The Advantages Of Business Hire Purchase

  • It’s a useful agreement if you can’t afford to make a big payment upfront.
  • It’s flexible, straightforward and relatively easy to understand.
  • At the end of the contract, you may get to own the asset.
  • It’s a fixed rate loan so interest rates tend to be low.
  • It could be easier to get than other loans if you have poor credit history, because you hire the asset, rather than buy it outright.
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The disadvantages of business hire purchase

  • You don’t own the asset fully until the end of the contract.
  • This means you can’t sell or modify the asset, until you own it.
  • If you fail to keep up payments, the financer can take the asset away and your credit record will be affected.
  • Monthly payments and interest rates could be higher than for other types of leasing or loans.

What happens at the end of hire purchase?

If you have not chosen to terminate the hire purchase contract early, then you will have the option to purchase the asset at the end of the contract for a small fee. The asset is then yours and you can modify it as you like and are solely responsible for its upkeep and repairs.

Need to see a hire purchase example?

Once you’ve found an asset you want to buy, you’ll know the amount you want to borrow. Here’s an example to explain how it works, using a van priced at £14,000.

  1. You pay a deposit – 10% in this case (£1,400).
  2. You borrow the amount outstanding at a set interest rate and over an agreed repayment period – so £12,600 at 5% APR over three years.
  3. You then make set repayments each and every month to the finance company – £378/month.
  4.  After three years and your final repayment, you take ownership of the vehicle after paying a transfer fee – £100 in this case.

Remember, if you fail to keep up payments, the finance company is entitled to seize the asset.

 

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