What is hire purchase?

Hire purchase is a way of buying an asset, such as a vehicle, piece of machinery or equipment, by spreading the cost over a fixed period through regular installments. Unlike outright purchase, you don't own the asset until the final payment is made. 

It’s different to leasing as ownership is always the intended end point. Hire purchase is one type of asset finance that spreads the cost of an asset over fixed installments, while giving businesses the certainty of knowing they'll own it outright at the end of the agreement.

How does hire purchase work?

With hire purchase, a finance provider buys the asset on your behalf. You then make fixed monthly payments over an agreed term, typically 1 to 5 years, until you've paid off the total amount owed, including interest and fees. You use the asset throughout the agreement but legally, the finance provider owns it until the final payment clears.

Deposit, instalments and the final payment

Most hire purchase agreements begin with a deposit, usually 10% to 20% of the asset's value, though this varies by provider. The remaining balance, plus interest, is then divided into equal monthly payments. Some agreements include a small option-to-purchase fee at the end, which formally transfers ownership to you.

Balloon payment and option-to-purchase fee

Some hire purchase agreements are structured with lower monthly payments and a larger final 'balloon' payment at the end of the term. This can reduce what you pay each month but means a bigger lump sum is due at the end. The option-to-purchase fee is usually a nominal amount that formally completes the transfer of ownership once the balloon or final installment has been paid.

Hire purchase example

Here's a simplified illustration of how hire purchase might work for a business buying a commercial van:

• Asset value: £25,000

• Deposit (10%): £2,500

• Amount financed: £22,500

• Term: 3 years (36 months) at a representative rate of 7% per year

• Estimated monthly payment: approximately £695

• Total amount repaid: approximately £27,520 (including interest)

These figures are illustrative only and your actual rate and repayments will depend on your business's circumstances and the specific agreement. Always check the total cost of credit before signing.

What is business hire purchase?

Business hire purchase works on the same principle as personal hire purchase, but is taken out in the name of the business. It's typically used to fund hard assets that will be used in the day-to-day running of the business and retained for a significant period.

What businesses use hire purchase for

• Commercial vehicles and fleets (vans, HGVs, company cars)

• Agricultural machinery and equipment

• Manufacturing plant and industrial equipment

• IT infrastructure and technology hardware

• Construction equipment

VAT, capital allowances and tax treatment

You may be able to claim capital allowances on the full value of the asset in the year of purchase, rather than as a lease expense over time, which can reduce your tax bill more quickly. VAT is usually charged upfront on the full purchase price, which VAT-registered businesses can usually reclaim on their next VAT return. Always verify the current rules with your accountant or check HMRC guidance directly, as tax treatment can change.

Advantages of hire purchase

• Ownership at the end of the agreement, which is not the case with leasing

• Fixed monthly payments make it straightforward to budget over the term

• Capital allowances may allow you to offset the asset's cost against tax more quickly

• VAT on the purchase price can be reclaimed by VAT-registered businesses

• Preserves working capital, since you're not paying the full cost of the asset upfront

• The asset appears on your balance sheet, which can reflect the strength of the business

Disadvantages of hire purchase

• You don't own the asset until the final payment is made, meaning the provider can repossess it if you miss payments

• The total cost is higher than buying outright due to interest

• You're responsible for maintenance and insurance throughout the agreement, even though you don't yet legally own the asset

• Ending the agreement early can be costly, with early settlement fees or penalties depending on the terms

• Tied to a specific asset, so less flexible than a general business loan if your needs change

Hire purchase vs other finance options

Hire purchase vs finance lease

The key distinction is ownership. With hire purchase, you'll own the asset at the end of the agreement. With a finance lease, the finance provider retains ownership, and you hand the asset back or pay a residual to extend. A finance lease can keep monthly payments lower, particularly for assets that depreciate quickly, but hire purchase suits businesses that intend to keep the asset for its full working life.

Hire purchase vs a business loan

A business loan gives you a lump sum of cash that you can use for any purpose, not just a single asset purchase. If you want flexibility, or if your funding need isn't tied to one specific asset, a business loan may be the better fit. Hire purchase is asset-specific: it funds one purchase and the asset itself acts as security for the agreement. 

For funding that is not tied to a single asset, FlexiPay lets a business spread costs across a range of business expenses into fixed installments with a simple flat fee from 1.99%.

Ending an agreement early

It's possible to settle a hire purchase agreement early, but most agreements charge early settlement fees. Some include a voluntary termination right, which typically allows you to end the agreement once you've paid half the total amount payable, returning the asset to the provider. The exact terms vary between lenders.

How to apply for hire purchase

Business hire purchase is typically arranged through a specialist asset finance provider or a finance broker. You'll usually need to provide details of the asset you're buying, evidence of your business's financial position (such as accounts or bank statements), and basic business registration information. 

Through Funding Circle's asset finance service, you can make one application online and our team of experts will help you find the right deal from a range of providers.

FAQs

Do you own the asset with hire purchase?

Not until the final payment is made. Throughout the agreement, the finance provider legally owns the asset, though you have full use of it. Ownership transfers to you once all payments, including any option-to-purchase fee, have been completed.

Can you pay off a hire purchase agreement early?

Yes, in most cases, but early settlement usually comes with a fee. Check your agreement carefully before settling early. Some agreements also include voluntary termination rights once you've paid a set proportion of the total amount due.

What is the difference between hire purchase and leasing?

With hire purchase, you own the asset at the end of the agreement. With leasing (whether a finance lease or operating lease), the finance provider retains ownership and you typically hand the asset back, upgrade to a newer model, or pay a residual value to extend. Leasing suits businesses that want regular upgrades; hire purchase suits those who want to keep the asset long-term.

Is hire purchase suitable for short-term asset needs?

Hire purchase is generally better suited to assets you plan to keep for several years. If your asset need is short-term or you expect to want a newer model in a few years, an operating lease may be more cost-effective and flexible.

Disclaimer

14/08/26 – While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. All information is correct at time of publishing, and customers should do their own research before making financial decisions. If you have any questions, please speak to your professional adviser or seek independent legal advice.