Specialist finance

What is hire purchase?

Hiring may be an option if you want to purchase a big-ticket item but don’t have the cash to pay for it upfront. Hire purchase is similar to leasing, but you can make one big payment at the end of the contract instead of paying monthly payments. In this post, we’ll look at how hire purchase works, as well as its benefits and drawbacks.

APositive are workforce experts.
Discover how we can help your business start, scale & succeed.

What is a hire purchase?

A hire purchase is a form of payment that allows you to pay for a product over a period of time. You can choose to pay off the product in monthly installments or pay the full amount upfront. It’s also known as a deferred payment agreement.

If you’re intending on buying an asset for your business (ie you’re a company or sole trader), and if you record your business income and expenses on a cash basis, you can usually claim an Input Tax Credit (ITC) for all GST on that hire purchase on your next BAS.

When using hire purchasing, all interest and charges can accumulate GST - this is usually paid on settlement.

How does a hire purchase work?

A hire-purchase agreement is a form of credit, meaning you can buy and pay for the item over time. It’s a bit like taking out a loan, except that instead of paying back the whole amount, you pay off monthly installments until the debt is cleared.

When your hire purchase contract ends, you own the item outright. This means that if there are any problems with what you’ve bought, or if something goes wrong after purchase (after-sales service), then the retailer has to fix them as part of their legal obligations as a responsible business owner. You can terminate a hire purchase at any time by simply returning the goods; however, this isn’t advised as it may affect future opportunities for credit with them (and potential savings).

What’s the difference between hire purchase and leasing?

A hire purchase is a credit agreement where you pay for an item in installments. In contrast, lease purchase is similar, except that you don’t own the item at the end of the agreement.

Benefits of hire purchase

A hire purchase lets you pay for an item over time but get it immediately. You’ll have to make regular payments (usually weekly or monthly), but by splitting the cost of the item into smaller chunks, you can afford more than if you had to pay all at once.

Since the item you're buying is used as the security, the interest rate may be lower than other types of finance (for example, buying on a credit card). You’ll eventually own the item you’re buying, as opposed to simply leasing it and returning it at the end of the period

Drawbacks of a hire purchase

A hire purchase is a loan that you make to the company, but they own the goods until you pay off the cost of them. However, there are a few drawbacks to hire purchase:

You may have to pay a deposit or cancellation fee if you want out of your contract early.

Overall, you’ll pay more for the goods than they’ll sell for outright. The rate of interest may be higher proportional to your credit history. If you miss too many repayments, the lender can take back the item you bought.

If you’re considering a hire purchase agreement for second hand goods, check out the PPSR website to see if those goods have any money still owing, or other financial risks you may be liable for.

Hire purchase for a car

Using hire purchase can help buy a business vehicle, where you pay a deposit and then monthly payments until you have paid off the price. The big difference between hire purchase and buying with cash is that with a hire purchase, you don’t own the car until you have paid off the whole price. The great thing about a hire purchase is that it gives you flexibility on your payments - they can change depending on what’s happening in your life at any given time. For example, if your business goes through several periods of negative cashflow in a year, then this might be an option for you.

Hire purchase for laptop

If you’re looking to use hire purchasing for business laptops, consider whether you’re able to buy laptops outright first. Rent-to-own laptops and other business equipment often works out to be more than the retail price in the long run - however, it can be helpful if you need laptops for your business immediately but don’t have the cash on hand to buy outright.

Summary

If you’re considering using hire purchasing for your business, it pays to get all the information you can before making your decision. Make sure you understand how hire purchase works and what kind of loan payments will be made every month to decide whether this type of financing is right for you. At first glance, it may seem like an attractive option when purchasing expensive items with no money upfront; however, consider all other options before making this decision.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

Discover how Apositive can help your business grow

Our consultants have extensive experience assisting the growth of hundreds of businesses like yours. Get in touch with us today and see how we can make a positive difference.