Hire purchase (HP) is a form of asset finance where a business uses an asset (typically equipment or a vehicle) while paying for it in instalments. The lender owns the asset during the repayment period. Ownership transfers to the business when all payments (including a final option-to-purchase fee) have been made.
How It Works
- The lender purchases the asset on the borrower’s behalf
- The borrower makes regular monthly payments (capital + interest)
- During the hire period, the lender owns the asset
- At the end of the term, the borrower pays a nominal option-to-purchase fee and ownership transfers
Key Characteristics
- Capital allowances: The business can claim capital allowances from day one (because they are treated as the beneficial owner for tax purposes despite the legal ownership sitting with the lender) [VERIFY with HMRC guidance before publication]
- Balance sheet treatment: The asset appears on the business’s balance sheet as an asset, with a corresponding liability
- Fixed payments: Monthly payments are fixed for the term, providing cash flow certainty
Hire Purchase vs Finance Lease
The key difference: in hire purchase, ownership transfers at the end; in a finance lease, ownership typically does not transfer â the business leases the asset for its useful life and returns it at the end, or enters a secondary rental period.
Typical Uses
- Plant and machinery
- Commercial vehicles and fleets
- Agricultural equipment
- Manufacturing and production equipment
Related Terms
- Finance lease: asset finance where the lender retains ownership throughout
- Operating lease: shorter-term lease where the asset is returned at the end
- Asset finance: the broad category covering hire purchase, finance lease, and operating lease