A Hire Purchase agreement, or HP, is a vehicle finance arrangement where you technically hire the car with the option to buy it at the end of the contract. A deposit is usually payable at the onset of the agreement.
Questions you may have:
- Who owns the vehicle at the end?
- Is HP generally cheaper?
- Can I terminate early?
How does it work ?
Hire Purchase is very similar to a personal loan with fixed monthly payments being spread over the duration of the contract term with a fixed interest rate.
There are however two key differences, firstly as the name suggests, you essentially hire the vehicle over the period of the contract and purchase it at the end. Therefore, because you are hiring the car, the finance company retain ownership until the point at the end of the contract when you have made all payments due.At this point in time full ownership of the vehicle is transferred to you.
Secondly the loan is secured against the vehicle with the vehicle being used as collateral, this means credit risk of granting the finance is lower for the lender than it would be with an unsecured personal loan
The cost of financing the vehicle is spread over the contract period, cashflow is improved as no large capital outlay (as with outright purchase) is required.
Cost Of Finance
The Hire Purchase loan is secured against the vehicle with the vehicle being used as collateral, this means credit risk of granting the finance is lower for the lender than it would be with an unsecured loan.
Budgeting - Monthly rentals are fixed for the duration of the contract, helping to manage costs over a long period.
These rentals will be higher than a contract hire or contract purchase rental as the rentals are based on a fully amortised profile i.e. down to a zero residual value, as apposed to a contract hire or contract purchase agreement where the rentals would only take into account the difference in value between the purchase price and its residual value.
As there is no distance duration parameters the repayments are typically fixed for the purchase agreement.
Hire Purchase is a purchase product and as such as with any other vehicle purchase financing method no VAT recovery is available.
Residual Value Risk
As this is a purchase product the residual risk lies with the buyer, yourself.
Tax Deductible Expense
All repayments are tax deductible.
Vehicle Management and Administration
It is typical that the management and administration (in full or part) associated with this acquisition method is provided by a specialist Fleet management company / finance company, allowing you to free up internal resources to focus core business activities.
Early Termination Costs
Early Termination Costs - These will be equal to the actual costs incurred by disposing of the vehicle prior to its originally anticipated holding period.
Excess Mileage and Damage Charges
Excess Mileage and damage - These will be equal to the actual costs incurred via an adjustment to sales proceeds.
Option To Own The Vehicle
Title formally passes on payment of the final instalment.