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What is Hire Purchase?

Hire Purchase (HP) is a way of financing the acquisition of a vehicle over a fixed period of time on a basis similar to a bank loan.

Unlike a bank loan though, ownership of the vehicle remains with the finance company until the final payment is made on the hire purchase agreement.

In typical hire purchase arrangements the fleet operator is hire purchasing the vehicle, i.e. hiring it for a period of time with a view to purchasing it once an agreed number of payments or an agreed amount has been paid to the finance company, principally to avoid the tax drawbacks of contract hire or leasing for vehicles with higher levels of CO2 emissions.

There may also be a 'sales agency' agreement with the finance company for the finance company to sell the vehicle on behalf of the fleet operator for a fixed fee at the end of the contract, or for the finance company to repurchase the vehicle for an agreed amount (a 'minimum guaranteed future value').

What's in Hire Purchase Payments?

The finance company has to source the vehicle and dispose of it at the end of the contract. In addition, the finance company must fund the purchase as well. To cover these costs the finance instalments comprise:

The purchase price of the vehicle (less and deposit) 
Interest Charges
Profit Margin
Maintenance (Optional)

Normally the finance company will include the VED or 'tax disc' as a part of an optional service or maintenance contract.

Advantages of Hire Purchase

In addition, at the end of the contract the fleet operator can take ownership of the vehicle so it can profit from prudent management of the vehicle, such as achieving a better resale price than expected.

With an optional purchase and resale agreement the costs of running the vehicle are fixed during the replacement cycle, so the fleet operator can avoid unexpected costs.

Tax relief for the fleet operator on cars with a CO2 output over 110g/km is not limited in the same way as leasing, thereby reducing the total costs of contract purchase for cars with higher CO2 emissions compared to leasing, but there are deferrals of tax relief.

Disadvantages of Hire Purchase

Because the finance repayments cover repayment of the full purchase price, rather than just depreciation, the monthly repayments are more than those of Contract Purchase.

If the contract is terminated earlier than expected then the fleet operator may be required to pay a penalty (possibly a fixed number of instalments, or the difference between the capital already repaid and the sales proceeds achieved on disposal of the vehicle, or compensation for the loss in interest charges that the finance company would have received if the finance agreement had run to its full term).

Under accounting conventions applying at the date of publication, contract purchase must be disclosed on the balance sheet of a business as a liability. This can worsen the appearance of the financial position of a business.

For passenger cars (other than pool cars) VAT on the purchase price of the vehicle cannot be recovered, so the finance instalments are higher than comparable rentals for finance leasing.