Hire Purchase: Advantages and Disadvantages
If you need to buy something for either yourself or your business but you don’t have the immediate funds to hand, a hire purchase scheme can be a great way of getting your hands on it quickly while spreading the cost over an agreed period.
This method of financing results in a monthly repayment and transfer of ownership to you once the term ends and all funds have been repaid. There are some significant advantages and disadvantages to hire purchase though. Throughout this post, I’ll run through the most notable.
Advantages of hire purchase
- Rather than one big lump sum, you can spread the purchase cost of high ticket items. These include items such as cars, where you can pay over a period of 3 to 5 years typically.
- As the hire purchaser, you’ll own the asset after paying the last instalment which can make it a favourable alternative to a lease.
- You’ll have immediate use of the item once the agreement with the vendor has been signed off, rather than wait until you have saved enough.
- Hire purchase is a simple way of financing and typically relatively easy to obtain.
- The interest rate on hire purchases is fixed for the duration of the agreement. This is regardless of any changes the Bank of England make to the base rate.
- You can usually choose from a fixed term and deposit amount which reflects your circumstances and budget.
Disadvantages of hire purchase
- Hire purchase contracts are usually fixed, therefore if you find yourself in financial difficulty during that period, you may lose the asset and damage your credit rating.
- You’ll pay more for whatever it is you’re financing through hire purchase.
- You won’t own the asset until you have made the final hire purchase payment. Therefore the vendor has the right to seize it should you fall foul of their terms.
- Because you won’t own the asset, it won’t be protected if you’re made bankrupt. This is because it is technically still owned by the vendor during the agreement.
- The duration of most hire purchase schemes can be quite long – anywhere between 3 to 5 years. If it’s for a car, that can make a lot of sense, but for other purchases you’ll need to consider if there really is a benefit in spreading the cost for that length of time.
- Hire purchase agreements aren’t free. As with all forms of financing, you’ll pay a fee for spreading the cost. Many hire purchase schemes can prove quite costly in that regard.
- Mind the gap! If you are buying an asset – such as a car – and it is stolen/ destroyed before it is fully paid for, the insurance may not cover the replacement value. This means you could face a shortfall. “Gap insurance” can be arranged to cover this situation – but will add to your costs.
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From a funders perspective, I find that the team at WF Financial Solutions, really take the time to understand the customers’ needs and wants and with their vast experience are able to match them with the correct funders. This really helps the funders to build a fast and trustworthy relationship to ensure any facilities are provided in a timely manner.
- Wayne Spratt, Business Development Manager, Bibby Factors Yorkshire
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WF Financial Solutions is an independent broker of invoice, asset and trade financing solutions with links to lenders of all sizes and specialties. WF Financial Solutions has helped many clients through a range of lenders and their varying services and we are proud to offer advisory and introductory services to finance providers that suit your needs.
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