What is Hire Purchase?

Hire Purchase (HP) is a popular method for financing assets.

With a HP agreement, you usually pay an initial deposit and borrow the remaining amount from a finance lender to cover the asset cost. You then repay the borrowed amount in equal monthly instalments over an agreed period, usually between two to five years, with interest added to each payment. Once you’ve completed all the payments, the asset is yours.

How Does Hire Purchase Work?

In a Hire Purchase agreement, you pay for an asset through monthly instalments.

you can pay an initial deposit (if the item is vat applicable you can choose to put this down as a deposit, a VAT deferral is also an option with this type of agreement. You will borrow the remaining funds from a finance lender to cover the asset purchase price. You'll make regular monthly payments over a specified term—typically two to five years. During this time, you won’t own the vehicle; instead, you’ll be its registered keeper while the finance company retains legal ownership.

As the registered keeper, you’re responsible for insurance, servicing, and maintenance.

You'll own the asset outright once you've made all the payments, and the “Option to Purchase” fee at the end of the term.

What is a Finance Lease?

A finance lease is an agreement for businesses where contract hire isn't suitable. It provides flexibility and tax benefits for eligible companies and allows client but don’t have the accessible funds to pay for them up front.

In a finance lease, you can choose to pay either the full cost of the vehicle, including interest, over a specified period, or opt for lower monthly payments with a final “balloon payment” based on the vehicle's anticipated resale value. Throughout the lease, the vehicle remains owned by the leasing company.

This type of agreement is exclusively available to businesses, including limited companies, self-employed individuals, and sole traders; it is not available to private individuals. Many businesses favor this option due to its significant tax advantages.

How Could It Work for Your Business?

If you opt for a finance lease, you'll be renting it for a set period—typically two to five years—making regular monthly payments.

This arrangement allows your business to use the vehicle without the hefty upfront cost, manage its administration, and include the asset on your company’s balance sheet.

At the start of the lease, usage terms for the vehicle are agreed upon. As long as these conditions are met, monthly payments and interest rates remain fixed throughout the lease duration.

If your company is VAT registered, you can reclaim between 50% and 100% of the VAT payments, depending on whether you are leasing a car or a commercial vehicle. If you’re not VAT registered, you can spread the VAT costs over the lease term by including it in your monthly payments.

Your lease payments can usually be offset against taxable profits, although special rules apply for cars.

At the end of the lease, the vehicle can be sold to an unrelated third party, or you can pay the remaining balloon payment (if applicable) and continue using the vehicle under a secondary rental agreement.

What is Refinancing?

Asset refinance allows you to free up cash that may be tied up in assets your business owns. In this arrangement, you sell an asset to a financing company for an amount based on its current value. You then repay the loan in instalments over a specified period.

Unlike a secured loan, where you retain ownership of the asset and it can be repossessed if you miss repayments, asset refinancing involves selling the asset to the lender, who then leases it back to you. This arrangement is similar to a finance lease or a new hire purchase agreement.

How Does Asset Refinance Work?

One key advantage of asset refinancing is that you don’t need to own the asset outright to benefit from it. You can leverage this financing option even for assets that are still being paid off under existing hire purchase / finance lease agreements.

In such cases, the finance company would pay off the remaining balance of the agreement and lease the asset back to you, providing you with capital of up to 80% of the asset’s value.