Business Hire Purchase
Business Hire Purchase (HP) is a very popular type of finance that is used by businesses to purchase cars for their employees to use. Hire Purchase is available for both business and personal use and consumers can apply for this form of finance just as businesses can. Unlike many of the leasing options HP provides the company with ownership of the vehicle once the final payment has been made.
What is Hire Purchase and what does it involve?
HP is offered by many lenders and is a good way for a business to spread the cost of purchasing a vehicle over a set term. There is an option for a deposit to be paid on the vehicle which can help to reduce monthly payments. Once the term of the agreement has been completed the balance of the loan will have been paid and the business will own the vehicle.
The residual value of the vehicle is not a consideration when using hire purchase. Monthly payments are calculated by the retail value of the vehicle, the deposit (if used), the duration of the contract and the credit rating of the business. The businesses credit history is important as this will determine the risk associated to lender and therefore likely APR.
The contract is between the business and the lender although many people will use a broker in order to get the best price across a range of lenders. The lenders will only allow the car to be purchased from a recognised dealer to protect both the lender and future owner of the vehicle against rogue traders.
Advantages of Hire Purchase
- Often a business will not be able to afford to pay for a vehicle outright. This is even more unlikely when the business has to buy a fleet of vehicles. Therefore Hire Purchase offers the ability to purchase vehicles without having to pay the whole cost up front.
- In effect the monthly repayments are secured against the vehicle (although it is not a secured loan). On the plus side this means that it is easier to obtain finance, more so than trying to get an unsecured loan, as the lender has some security in the form of the vehicle.
- Hire Purchase has some advantages for business customers. Hire purchase goods are treated differently on a balance sheet and can be beneficial to taxable income.
- The buyer can claim a capital allowance for the vehicles depreciation as an asset. The interest elements of HP fee can be offset against taxable profits.
Disadvantages of Hire Purchase
- Interest rates usually depend on the businesses credit rating. If the business has a good credit history then the loan rate can be as low as a normal loan. If the credit rating is poor then the APR is likely to be higher and therefore the loan can work out more expensive.
- Monthly payments are generally higher as the business will be paying a set price to own the car not just to lease it.
- The business runs the risk of the car being repossessed if the payments are not made as the car is secured against the loan.
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