What is a Hire Purchase Agreement?
Hire purchase is a method of buying equipment by making payments over a period of time. It is a popular choice in recent years when funding the use of or equipment or vehicles for both businesses and personal use.
Payments and the interest rate are generally both fixed, although prior arrangements can be made to add flexibility to repayments (such as seasonal payments and balloon options) depending on your preferences and financial situation. Deciding on whether hire purchase is right for you or your business can be complicated. We talk through the options with our clients, discussing the benefits and any potential issues or considerations they should have, but if you want a quick to guide to some of the advantages and disadvantages of hire purchase, the following may be of use.
The Pros and Cons of Hire Purchase
Advantages of Hire Purchase
Advantages of hire purchase to the buyer include:
- You can choose a fixed term and deposit that suits you
- Seasonal repayments are often available
- The interest rate and payments are fixed throughout the term so you can plan your finances
- You can pay off a larger sum or “balloon payment” at the end of the contract
- Hire purchase enables you to acquire equipment even if you can’t afford to buy it outright
Often you can choose a fixed term and a deposit that fit your budget. These can be discussed and adjusted before a contract is signed, meaning you can design a facility that fits you and your circumstances. Often the longer the term of the agreement, the lower the payments will be each month. Seasonal repayments are also often available which means that you can tailor repayments based on your income if it varies at certain times of year. This flexibility means even if you can’t afford to buy company vehicles or equipment outright, you still have the option of the acquire them.
The rate of interest and monthly payments are fixed throughout the duration of the agreement. This allows you to plan outgoings and cash flow accordingly. A large payment at the end of the contract, known as a “balloon payment”, can also be used to reduce the monthly instalments. We encourage our clients to give serious consideration as to how they will finance the balloon payment.
Disadvantages of Hire Purchase
Disadvantages of hire purchase to the buyer include:
- If your financial situation changes during the fixed contract you may no longer be able to afford payments
- You will pay more for the asset overall compared to buying it outright
You are in a fixed contract, and therefore if your financial situation changes during that period and you can’t afford the agreed monthly repayments, you may lose the asset. Overall, you will pay more for the asset, if compared to buying for “cash”, as you’re paying interest in addition to the cost of the product.
What to do next
Hopefully this has summarised a few key points worth considering around hire purchase, but if you’re still not sure if hire purchase is right for you or your business you can find out more here. Alternatively, fill in our enquiry form on the right or call to speak to one of our account managers.