Hire Purchase (HP)

Hire Purchase

By Stephen Clark | Friday 9th February | 7 minute read

Hire purchase (HP) is a financial product that enables individuals or businesses to acquire assets immediately, with payments spread over time. It's frequently used to acquire vehicles, machinery, and equipment without full upfront payment.

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We arrange Hire Purchase for vehicle assets across various businesses and organisations.

  • Market-leading rates.
  • Hire Purchase from £50,000 to £250,000,000.
  • Yellow plant, crane finance, excavator finance, forklift finance, dumper finance, loader finance, telehandler finance.
  • Commercial vehicle hire purchase for vans, pick-ups, refrigerated trucks, trailers and HGVs.
  • Agricultural finance, such as Tractor Finance, or financing Combine Harvesters, Balers, Ploughs and Utility Vehicles. 
  • Company cars, from pool cars to executive car fleets and C-suite level.
  • Emergency service and specially adapted vans, cars, boats and aircraft.
  • Available to companies in & England, Scotland, Wales and Northern Ireland.

Examples of Hire Purchase

Hire Purchase is available for many passenger vehicles, enabling businesses to spread the acquisition cost over time. Typical examples include:

  • Cars: Sales cars, Sedans, Estates, Luxury cars, Convertibles,  Coupes, Hatchbacks, MPVs, rental fleets and 4x4s.
  • Bus: Buses, minibuses and coaches.
  • Light Commercial: Trucks, Vans, Pick-ups, Taxis and Limousines.
  • Emergency Services: Ambulances, Police cars and vans, Fire engines, Police watercraft and Coastguard boats.
  • Motorcycles: Motorcycles, trikes, quads and ATVs.
  • Aircraft: Light aircraft, Private jets, commercial planes and helicopters.
  • Boats: Bowriders, Catamarans, Cruisers, Deck boats, Dinghies, Ferries, RORO Ferries, Rigid inflatables, Sailboats, Ships, Tankers, Trawlers and Yachts.

The Benefits of Hire Purchase for Your Business

Hire Purchase can bring tangible benefits to any business that needs to access a new asset but doesn't want to use its cash reserves. Here are the top 7 reasons why companies use it.

  • Maintain cash flow
  • Access to tax relief
  • Acquire assets quickly 
  • Gain flexibility to upgrade or replace assets
  • Risk protection against fluctuations in asset prices
  • Affordable payment terms
  • Protect lines of credit and cash reserves

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2024 Hire Purchase Guide

Hire Purchase: Overview, how it works, advantages, and disadvantages

Hire purchase is a financing arrangement enabling individuals or businesses to acquire assets immediately, with payments spread over time. This approach, frequently employed for acquiring vehicles, machinery, and costly equipment, allows significant purchases without full upfront payment.

The process entails selecting the desired asset and agreeing on terms with the vendor or finance company—including deposit, instalment amounts, and interest rate—followed by an initial deposit payment. The asset is delivered immediately, while regular instalment payments are made. Ownership of the asset transfers to the buyer after all payments, including any final purchase fee, are completed, with some agreements offering a return option if ownership is declined.

Advantages include effective cash flow management, immediate asset use, fixed interest rates, flexible terms, potential tax benefits for businesses, and no need for additional collateral. Disadvantages encompass higher overall costs due to interest, delayed ownership, repossession risk, cash flow impact, potentially higher interest rates, early settlement penalties, maintenance and insurance responsibilities, limited flexibility, credit commitment implications, and depreciation risks.

Alternatives to hire purchase include outright purchase, leasing, personal and business loans, peer-to-peer lending, and credit cards, each offering distinct benefits suited to different financial situations and preferences. Choosing the best financing method requires careful consideration of each option's terms, costs, and financial implications.

What is Hire Purchase?

A Hire Purchase Agreement is a financial arrangement that allows individuals or businesses to acquire an asset by making an initial deposit and then paying the remaining balance, plus interest, in instalments over a specified period. At the end of the payment term, ownership of the asset transfers from the seller or finance company to the buyer.

This method is commonly used for purchasing vehicles, machinery, and expensive equipment, spreading the cost of significant purchases without paying the full price upfront.

How Does Hire Purchase Work?

Hire purchase is a financing arrangement that allows you to acquire an asset immediately and pay for it in instalments over a predetermined period. Here's how it typically works, broken down into steps:

Selection of Asset

You choose the asset you wish to purchase, ranging from equipment, plant, vehicles and machinery to electronic equipment.

Agreement with Vendor or Finance Company

You enter into an agreement with the seller or a finance company, which outlines the hire purchase terms, including the deposit, the number and amount of payments, the interest rate, and the total cost.

Payment of Initial Deposit

You pay an initial deposit upfront, a percentage of the total purchase price of the asset.

Asset Delivery and Use

Upon deposit payment, the asset is delivered to you, and you gain the right to use it immediately.

Regular Installment Payments

You make regular instalment payments over the agreement's term. These payments cover the asset's cost plus interest charges.

Ownership Transfer

Once all the instalments have been paid, including a final option to purchase fee (if applicable), asset ownership is transferred from the seller or finance company to you.

Option to Return or Buy

If you decide not to take ownership of the asset at the end of the agreement, some hire purchase contracts may offer the option to return the asset.

This financing method allows you to budget effectively to acquire essential assets while preserving cash flow and capital for other business operations or personal needs.

Hire Purchase comes with both advantages and disadvantages

What are the advantages of Hire Purchase?

Hire purchase is a popular method of acquiring assets while spreading the cost over time. It appeals to both individuals and businesses for several reasons, with the most important factors to users typically including:

Cash Flow Management. It enables users to manage cash flow effectively by spreading the cost of expensive items over a period rather than making a large upfront payment.

Immediate Use. Users gain immediate access to the asset, critical for business operations or personal needs, without waiting until they have saved the full purchase price.
Fixed Interest Rates: Hire purchase agreements often have fixed interest rates, providing predictability in financial planning and budgeting.

Ownership Option. At the end of the agreement, users can own the asset outright after making a final payment, known as the "option to purchase" fee.

Flexibility. Terms can be flexible, with agreements tailored to match the user's cash flow through adjustable repayment periods and amounts.

Tax Benefits for Businesses. Payments can often be offset against taxable profit (depending on local tax laws), and the interest on payments may be tax-deductible.

No Collateral Required. Unlike some loans, the asset itself often serves as security for the finance, negating the need for additional collateral.

Access to High-Quality Assets. Users can access higher-quality or more expensive assets than they might afford if required to pay the full amount upfront.

Protection Under Consumer Credit Acts. In many jurisdictions, hire purchase agreements are regulated, offering consumer protection.

Avoidance of Depreciation Risks. This is especially relevant for businesses, as the asset can be updated or replaced at the end of the hire purchase agreement to ensure operational efficiency.

These factors make hire purchase an attractive option for acquiring vehicles, machinery, equipment, and other high-value items by offering a manageable financial arrangement that aligns with users' needs and capabilities.

What are the disadvantages of Hire Purchase?

Hire purchase agreements, while offering several advantages, also have disadvantages. Here are some of the potential downsides:

Overall Cost. The total amount paid by the end of a hire purchase agreement can be higher than paying for the asset outright due to interest charges and administrative fees.

Ownership Delay. The buyer does not own the asset until all payments, including the final option to purchase fee, have been made. This means the asset cannot be sold or modified significantly without the lender's consent during the agreement term.

Risk of Repossession. If payments are not made on time, the lender repossesses the asset, leaving the buyer without the asset and any payments already made.

Impact on Cash Flow. Regular payments over the agreement term can impact a business or individual's cash flow, especially if financial circumstances change unexpectedly.

Interest Rates. Interest rates on hire purchase agreements may be higher than other financing options, such as bank loans, especially if the buyer's credit rating is not strong.

Early Settlement Penalties. Some agreements include penalties for early settlement, making paying off the agreement early and taking ownership of the asset is expensive.

Maintenance and Insurance. The responsibility for maintaining the asset and ensuring it is insured typically falls on the buyer, adding to the hire purchase cost.

Limited Flexibility. Once entered into a hire purchase agreement, adjusting the terms or ending the agreement early can be difficult and costly, limiting financial flexibility.

Credit Commitment. Taking on a hire purchase agreement is a long-term credit commitment, which might affect the borrower's ability to obtain additional credit.

Depreciation. The buyer bears the risk of the asset depreciating over time, which can be particularly concerning for assets that lose value quickly.

While hire purchase agreements can often be an effective way to finance the acquisition of assets, these potential disadvantages require assessing whether this form of financing aligns with their financial strategy and capabilities.

What are the alternatives to Hire Purchase?

Alternatives to Hire Purchase offer different benefits and may suit various financial situations or preferences. Here are some common alternatives:

Outright Purchase. Paying the full cost upfront eliminates interest charges and gives immediate asset ownership. 

Leasing. Leasing involves using an asset for a set period in exchange for regular payments. At the end of the lease term, the asset is returned to the lessor. This can benefit assets that rapidly depreciate or those looking to upgrade regularly.

Operating Lease. An operating lease is similar to renting and is often used for equipment that is only needed for a short period, or that is frequently updated.

Finance Lease. A finance lease is a longer-term lease that covers a significant portion of the asset's useful life. The lessee typically bears the maintenance costs and can purchase the asset at the end of the lease term.

Balloon Payment Finance. It is similar to a hire purchase but with a larger final payment (balloon payment) that reduces the monthly payments. This can be useful for those who expect to have a lump sum available later.

Residual Value-Based Lease. A Residual Value-Based Lease (RVBL) is a leasing agreement where payments are based on the asset's estimated residual value at the end of the lease term.

Business Loan. Like a personal loan tailored for businesses, a business loan can cover the cost of assets, and the business owns the asset from the outset.

Bridging Loan. Secured against fixed assets like real estate, a bridging loan is short-term finance that is useful for quickly raising substantial sums of money for urgent transactions.

Personal Loan. Taking out a personal loan provides the funds to purchase the asset outright, potentially at a lower interest rate than hire purchase, depending on creditworthiness and market conditions.

Peer-to-Peer Lending. Depending on the borrower's credit profile, borrowing from individuals through a peer-to-peer platform can offer competitive interest rates for buying assets.

Credit Cards. Credit cards may offer an affordable way to spread the cost, especially if 0% interest deals are available for smaller assets. However, high-interest rates may apply after the initial offer period.

Choosing the right alternative to hire purchase depends on several factors, including the type of asset, financial situation, cash flow, and whether ownership or just use of the asset is the goal. Before deciding, it is important to consider each option's terms, costs, and implications.

We're financial experts who arrange Hire Purchase (a form of asset finance) for business owners, securing you the best rates and terms from over 200 UK lenders, including private equity firms, investors and family offices.

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