Hire Purchase (HP) agreements are finance arrangements that are secured against a product. Until the agreement has ended and been paid off in full, the product does not belong to the borrower. Hire purchase agreements are a form of asset finance and are paid back in monthly instalments, the rate of which is agreed with your lender.
They differ from lease agreements in that customers are offered the option to purchase the asset outright at the end of the fixed term.
As lenders retain ownership of the asset until the agreement has ended, whilst you are still making payments you are not allowed to sell or dispose of the goods without permission. The lender will be able to repossess the goods if your business falls behind with payments.
Hire Purchase Agreement Key Features
- Lender purchases the asset
- Funding is secured against the asset
- You repay the finance company over an agreed term
At the end of the agreement, you will be given the option to own the asset outright upon payment of an option to purchase fee. Alternatively, the asset can be returned to the finance company.
Finance companies will disclose all fees and charges in the terms and conditions of the Hire Purchase agreement. This will be provided in the documents that you sign.
Benefits of a Hire Purchase agreement
- The funding is secured against the equipment
- Available on nearly all equipment purchases
- Spreads the cost of the purchase
- Potential to own goods at the end of the agreement
What happens at the end of the agreement?
There may be instances in which you need to finish a hire purchase agreement early. If this happens, you will have two options.
EARLY SETTLEMENT
You can settle a Hire Purchase agreement at any point by paying the outstanding balance and the Option to Purchase fee to the lender. However, there may be additional charges for settling the agreement early. This usually results in the client owning the asset but different lenders have different terms.
END OF AGREEMENT/CONTRACT
At the natural expiry of a Hire Purchase contract, once all the contractual payments have been made, you can either pay the Option to Purchase fee and take legal title to the asset or simply return the equipment to the finance company.
Hire Purchase Agreement Pros and Cons
Pros
- Quick and simple to arrange
- Defined monthly payments
- Fixed interest rates
- Flexible terms
Cons
- Risk of repossession if payments are not met
- You do not own the items until the agreement has ended
- Subject to status
For further info on Asset Finance and Hire purchase contact our team of experts.
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