Previously in our A-Z, we explored contract purchase and contract hire purchase financing for fleet vehicles. The main difference was that at the end of a contract purchase agreement, you have the option to pay a “balloon” payment to take full ownership of the vehicle, rather than returning it. With hire purchasing, if you know from the outset that you are keen to keep the vehicle at the end of the agreement, this option may be best for you. A hire purchase requires an upfront deposit, somewhere in the region of 10-50 per cent of the total cost of the vehicle. The rest of the value of the asset is then paid in monthly instalments. When the full amount has been repaid, the car is yours. Company cash flow benefits from hire purchase because it does not need to use cash resources to make a capital outlay for the purchase price of the asset up front. Another significant attraction of hire purchase is the flexibility for businesses to end the agreement early. Keep in mind that you will need to keep up with the cost of the repayments. If you do miss payments, the car can be repossessed – it goes without saying, this can be a total disaster for business. Interest rates can be high on a hire purchase agreement and are decided by your credit rating. It is not always in the dealer’s interest to get you the best deal when loaning you money as they can earn commissions. Shop around before committing to a deal. Always check out the annual percentage rate (APR) to ensure that you fully understand the real cost of borrowing.
If you’ve found this article useful then make sure you visit our complete A-Z of business fleet terms, which provides a complete glossary so you can make an informed purchasing decision.
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