Hire Purchase Advantages and Disadvantages

Hire purchase (HP) can be a great way to finance buying a high-quality asset without a large financial outlay upfront.

And while it’s a popular finance plan, it’s not always the best option for every situation. 

To help you make the right decision, we’ll explain what HP is, how it works, and dive into hire purchase advantages and disadvantages.

What Is a Hire Purchase?

Hire purchase (HP) is a type of finance plan (similar to a finance lease) that’s commonly used to purchase an expensive asset– like a vehicle– without having to pay the full amount upfront.

Under an HP contract, you pay a deposit and then pay off the asset in monthly instalments (plus interest) over a fixed period – typically 2 to 6 years. 

During that time, the finance company remains the legal owner of the asset and uses that ownership as a security against the loan. This means that if you fail to keep up with your repayments, the company has the right to repossess the asset.

You’ll become the legal owner of the asset once you make the final payment and cover the ‘Option to Purchase fee at the end of the agreement. 

What are the features of hire purchase?

The main features of an HP agreement include:

• The customer puts in an initial deposit (typically 10%).
• The customer gets possession of the asset immediately.
• They pay off the loan in fixed monthly payments with interest.
• The customer becomes the legal owner of the asset after they pay off the loan and cover the ‘Option to Purchase fee.
• The finance company has the right to seize the asset should the borrower fail to keep up with repayments.

Types Of Hire Purchase

There are two types of hire purchase agreements:

• Personal Hire Purchase: This type of agreement is between a private consumer and a dealership (or a private seller). In this case, the borrower looks to purchase the asset for private use.

• Business Hire Purchase: Businesses can also buy assets for the company through an HP contract. This can include any type of equipment it may need or a vehicle for transportation purposes.

Advantages of Hire Purchase

There are many benefits of choosing a hire purchase over other finance options, including:

• Spread the cost 

The most obvious advantage of hire purchase is that it lets you pay for the asset in affordable instalments over a set period.

• Access high-spec assets

Since most of us operate on a limited budget, purchasing an asset outright means that there’s a limit on how much you can afford to pay for it. An HP agreement would allow you to opt for a more expensive and higher-quality asset, which you can start using immediately.

• Lower interest than other funding options

When it comes to interest rates, hire purchase has clear advantages over other funding options such as credit cards, loans, or overdrafts. The interest rates with an HP are not only lower compared to other options, but they’re also fixed. 

• Claim capital allowances against tax

Using a hire purchase for financing asset purchases can be more tax efficient than standard loans. You’ll be able to reduce your taxes and save some money by claiming a capital allowance at the start of the hire purchase agreement.

• Less dependent on credit score

An HP contract is more like a secured loan. You’ll be able to get a hire purchase even if you don’t have a good credit score because the asset will be used as collateral for the loan.

• Fixed monthly payments 

HP monthly payments are pre-determined and fixed, which means you’ll know exactly how much you need to pay toward your Hire Purchase agreement every month and budget accordingly. 

• Reduce repayments to fit your budget

If you can afford it, you can pay a bigger deposit (usually larger than 10%) to reduce the monthly repayments of your HP deal. Alternatively, you can opt for a balloon payment – a lump sum you’ll need to pay at the end of the contract– that will allow you to pay less in monthly instalments.

• Own the asset after the last instalment 

The biggest hire purchase advantage is that you become the legal owner of the asset once the HP agreement ends (and you pay all of your monthly instalments).

Disadvantages Of a Hire Purchase

Despite its popularity, hire purchase as a source of finance has some disadvantages that make it unsuitable in certain circumstances. 

• You can lose the asset

 One of the biggest hire purchase disadvantages is that If you can’t keep up with your repayments, the finance company has the right to seize the asset.

• Ongoing fixed payments

Taking out a purchase hire agreement means that you’ll have to set aside a chunk of your income to pay toward the asset you’re trying to buy for a set time. Most HP agreements last for more than 2 years.

• Higher overall cost

In the long term, you’ll pay more for the asset in an HP agreement than what you would have to pay if you were buying the asset outright. 

• Asset depreciation

Another disadvantage of hire purchase is that the asset may lose its value by the time you become its legal owner. 

• Missed payments can impact your credit score

Missing your repayments or making a late payment can damage your credit rating and your ability to borrow in the future.

• Bad credit = high-interest rate

While getting a hire purchase with adverse credit is possible, as it is a form of secured loan, your interest rates will probably be higher.

Bottom Line 

A hire purchase agreement can be an excellent solution if you’re looking to buy something pricier and you don’t have the funds to pay for it outright. This type of finance plan will allow you to spread the cost of the purchase into affordable monthly instalments that fit your budget and get access to the asset immediately.

Still, an HP agreement also has its downsides, so it’s best to go over all of your options before making a final decision.