A hire purchase agreement is effectively a rent to own contract. After all the agreed payments have been made, you can exercise your option to purchase the goods for a predetermined price (usually a nominal sum) or return the goods back to the owner.
Regular hire purchase payments can be reduced by opting for an end of term deferred balance often referred to as a balloon payment. This deferred lump sum will normally have been calculated to reflect the assumed residual value of the asset at the end of the hire purchase agreement term.
The Main Advantages of Hire Purchase:
- Fixed monthly costs – this enables you to budget.
- Ownership – at the end of the agreement you own the asset.
- Free up capital – you are not investing cash in a rapidly depreciating asset.
- Reclaim your VAT.
- Tax advantages – normally you can claim writing-down allowances and perhaps capital grants, while repayment interest may be offset against profits and VAT is usually reclaimable (rules apply to cars