The hire purchase agreement has become a very popular way for businesses to purchase expensive equipment on finance. It allows you to spread the cost of high-ticket items over a term that suits you with manageable monthly payments. Here’s 6 essentials you need to know about hire purchase contracts:
- Ownership position
With a hire purchase contract the legal owner of the equipment is the lender. As the borrower, you are the Hirer. This position remains the same over the course of the term until the end. Ownership passes to the Hirer at the end of the contract, which is to say once all repayments – including interest and any associated fees – have been repaid.
- Fixed or variable interest
A hire purchase contract can have a fixed or variable interest rate. A fixed interest rate means your monthly repayments will always be the same. A variable interest rate means your monthly repayments could go up or down (although the lender must always inform you of any change in good time). Most businesses prefer the certainly of a fixed rate over a long term and the lower cost of a variable rate over a short term.
- Easier to obtain than a standard loan
As a repayment facility hire purchase is usually easier to obtain than a standard business loan because the finance is secured against an asset that covers the value. However, only a select few specialist lenders, like us, offer it. Therefore to benefit from a hire purchase you may need to approach an independent B2B lender.
- Tax advantages
Hire purchase agreements come with two tax advantages. The first is the interest on repayments is tax deductible against your profits (please note this excludes vehicles such as cars and vans). The second is VAT is only payable on the rental, not the purchase price, so a reduced VAT liability is possible with hire purchase.
- Margin of finance
It is possible to borrow up to 90% of the value of equipment on a hire purchase contract and sometimes more with the right lender. The higher your deposit is, the less you need to borrow so the lower your monthly repayments will be. If you don’t have a bigger deposit then you may need to approach a specialist lender like us. Another option you have is an operating lease which keeps repayments down.
- Not keeping up with repayments carries two risks
Because you do not own the assets listed under a hire purchase agreement until you have repaid what is owed in full, if you go bankrupt or default on your payments, the lender can repossess the assets in question. Communicating with the lender can put you back on good terms, but there is also a second risk.
The second risk associated with a hire purchase also stems from not keeping up with repayments – a damaged credit profile. If you miss any payments then these are automatically logged in your credit history, which may damage your credit score and make obtaining credit in the future more difficult.