A hire purchase is a financial arrangement where a buyer makes an initial down payment for expensive goods and pays the remaining balance, plus interest, in instalments. This method allows the buyer to have and use the asset while paying for it over time, with ownership transferring to the buyer only after all payments are completed.
Hire Purchase agreements (sometimes called HP) are secured lending which means the assessment of whether you can have the funds are not entirely reliant on the risk associated to the person applying. It comes in handy when you’ve had some previously bad credit or not enough business history.
Pros:
- Spread Costs: You can spread the cost of high-ticket items over time, making it easier to manage cash flow.
- Immediate Use: You have immediate use of the item once the agreement is signed, without waiting to save the full amount.
- Fixed Interest Rates: The interest rate is fixed for the duration of the agreement, providing predictability in financial planning.
- Ownership: After the last instalment, you own the asset, which can be a favourable alternative to leasing.
- Flexibility: You can usually choose from a fixed term and deposit amount that reflects your circumstances and budget.
Cons:
- Higher Overall Cost: You’ll pay more for the asset due to interest charges and administrative fees.
- Risk of Repossession: If you can’t make payments, the asset can be repossessed, and you may damage your credit rating.
Ownership Delay: You won’t own the asset until the final payment is made, which means the vendor can seize it if you violate terms. - Long Duration: Most hire purchase agreements last between 3 to 5 years, which may not always be beneficial.
- Additional Costs: Hire purchase agreements aren’t free; fees for spreading the cost can be quite costly.
During the Contract
Whilst long in duration, you can make amendments to the contract. You can reschedule the contract by changing payments, contract lengths, payment dates etc. most funders will charge you an administration fee and potentially an additional interest payment as part of the adjustment.
Ending the Contract
At the end of the contract term, a nominal fee is paid to pass the ownership of the asset from the funder to you. This amount is agreed in the initial contract and often called an Option to Purchase (OTP) fee.
Additionally you may choose to settle the contact early by requesting a settlement quote from the funder. These are usually the remaining payments due but with a discount. This discount varies from funder to funder but worth knowing that if you want to finance another asset there is usually a higher discount available.
Examples – Construction
In the construction industry, hire purchase agreements are often used for acquiring heavy machinery like excavators, bulldozers or cranes.
The construction company pays the deposit, usually ranging 5 – 20% of the overall cost. This asset can then be used to generate cash that can then be used to pay for the asset.
Examples – Manufacturing
Manufacturer A wants to create a new product and requires some additional production lines to make these. By using a hire purchase the manufacture can buy the production line by only paying the deposit and then production line can then be used to pay the instalments.
The Gaffer 