Hire Purchase is a straightforward finance agreement leading to ownership once all the payments have been made.
The amount of each repayment and the length of the agreement are fixed in advance.
What are the benefits?
- Fixed-rate, fixed-term finance — both the interest rate and the length of the agreement are fixed at the start,
so you know exactly how much you will be paying each month.
- Company asset — the vehicle will appear as an asset on the company's accounts, allowing you to claim capital allowances.
- Ownership — once all the payments have been made, you own the vehicle.
- Low rates — if your intention from the outset is to own the vehicle, hire purchase will provide the cheapest financing option.
Things to note
- VAT is recoverable for a commercial vehicle, but not for a car unless it is used exclusively within the business (in which case HMRC
imposes a high burden of proof that a car has no personal use).
- The risks of ownership lie with you — the effects of depreciation, and the costs of maintenance and disposal are all risks that
you bear (of course, this also means that you benefit from the equity in the vehicle once you own it).
- If you opt for a high final payment (a "balloon payment"), you must be sure you can afford to pay it at the end of the contract, as
it is not optional. In some cases, the balloon payment may end up being more than the vehicle's value.
How does it work?
The interest rate and agreement length are fixed at the start. Initial payments can be low on hire purchase, or you can choose a higher deposit,
including using a part-exchange to cover this. You can pay the finance off in equal monthly instalments, or you can add a final "balloon"
payment, which will reduce your monthly payments by delaying paying off the last chunk of the finance until the very end of the contract.
Unlike a PCP contract, this balloon payment is not optional, so you will need to ensure
you can afford to pay it when it becomes due.
Once you have made the final payment, the vehicle is yours.
What are Lease Purchase and Conditional Sale agreements?
Lease purchase is a term used to describe a hire purchase with a balloon payment (in which case hire purchase normally refers to an agreement
without a balloon). Other than the balloon payment, there is no difference between hire purchase and lease purchase.
As the name suggests, with hire purchase you hire the vehicle during the agreement. At the end, you pay an option to purchase fee, which is
required to legally transfer ownership from the finance company to you. A conditional sale agreement works in an almost identical way,
except that there is no option to purchase fee — ownership passes automatically to you once the final payment has been made, without
the legal necessity of a nominal fee.