Hire purchase explained

Looking to acquire new tools, machinery, or vehicles for your business? With hire purchase, you can spread the cost of essential assets over time, helping manage your cash flow while gaining full use of the equipment. 

Compare hire purchase offers today to find the best deal for your business.

Man in apron using tablet, with a sidebar listing asset finance options: trucks, waste recycling, gym equipment, construction, buses.

What is hire purchase?

A hire purchase agreement is a type of asset finance. It involves a lender buying the asset on behalf of your business. You then repay the cost of the asset in monthly instalments over an agreed term, typically between 1-5 years. The payments are calculated based on the asset’s price, interest rates, and sometimes its projected future value.

Once the final payment is made, you can choose to take full ownership of the asset, return it to the lender, or in some cases, sell it and receive a rebate depending on the final sale price.

This flexible financing solution allows you to invest in your business without needing to pay the full amount upfront, keeping your cash flow healthy and manageable.

Hire purchase agreements are secured loans.

How does hire purchase work?

Here’s a step-by-step for how hire purchase works:

  1. You select the asset you want for your business, which can range from machinery, vehicles, or office equipment.

  2. Apply for hire purchase from your Capitalise account. We’ll match you with the lenders most suited to your needs. If you’re looking for a vehicle, you can use your Capitalise account to search the registration and receive several finance offers showing potential monthly costs. 

  3. If approved, you’ll receive the terms of the hire purchase agreement, such as how long the term will be and how much interest you’ll pay. 

  4. You’ll pay an initial deposit to the lender, typically ranging from 10% to 20% of the asset's value.

  5. The remaining balance, plus interest, is paid through fixed monthly instalments over the agreed-upon term.

  6. Upon completion of all payments, ownership of the asset is transferred to your business.

What are the advantages and disadvantages of hire purchase?

Advantages of hire purchase

Disadvantages of hire purchase

Hire purchase requires a lower upfront payment compared to outright purchase, meaning you can preserve capital for other operational needs.

A hire purchase agreement will cost more in the long term than purchasing outright due to the interest on the loan. 

Monthly instalments remain fixed throughout the hire purchase term, so you can forecast your cash flow and budget effectively. 

If the asset being financed depreciates before the end of the hire purchase term, you may end up paying more than the asset's value.

If your business is eligible, the monthly payments you make for the asset can be considered a business expense, which can lower your Corporation Tax. Consult with your accountant to see how this applies to your specific situation.

Unlike leasing, hire purchase agreements typically offer less flexibility for early termination or upgrading to newer assets. 

What assets can you finance through hire purchase?

Hire purchase can be used to finance a wide range of business assets, including:

Vehicles

  • Vans: perfect for logistics, deliveries, and transportation services.

  • Cars: ideal for sales teams, executive transportation, or general business use.

  • Electric vehicles (EVs): with the UK’s Net Zero target by 2050, many businesses are choosing electric vehicles. Hire purchase helps you transition to an electric fleet while managing costs.

Plant & machinery

  • For industries like manufacturing and construction, hire purchase allows you to spread the cost of expensive machinery.

Office equipment

  • From computers to office furniture, hire purchase lets you equip your workspace without a significant upfront investment.

A hire purchase example

Imagine you're looking to acquire a new delivery van for your expanding catering business. Here’s how a typical hire purchase agreement might unfold, broken down into simple steps:

1. Choosing your asset
You decide on a van that costs £20,000. It’s the perfect fit for delivering your goods efficiently.

2. Searching for finance
Using your Capitalise for Business account, you search the vehicle registration and receive several finance offers showing potential monthly costs.

3. Applying for hire purchase
You choose the best finance offer and apply for a hire purchase agreement with the lender.
The lender assesses the financial health of your business and approves your application.

4. Receiving the offer
The terms of the hire purchase are laid out:

  • Price of the Van: £20,000

  • Deposit: you pay a £4,000 deposit (20% of the total cost).

  • Repayment Term: the remaining £16,000 will be paid over 4 years.

  • Interest Rate: the annual interest rate on the balance is 5%.

5. Monthly payments
Your monthly payment comes to approximately £368, covering both the principal and the interest.

6. End of the term
After 4 years, you've paid off the van in full. The lender transfers ownership to you officially. You now own the van outright without needing to make any further payments.
By the end of the term, the asset is yours, supporting long-term business growth without overwhelming your cash flow.

This example shows how hire purchase can help you manage large expenses by breaking them down into manageable payments, while you continue to use the asset in your business operations from day one. 

Tips that could help lower your monthly payments

There are factors impacting the cost of a hire purchase agreement. Here are some tips that could help  lower repayments:

  • Maintain a good business credit score: a better business credit score often means you will be offered  more favourable interest rates and terms.

  • Choose a longer term: extending the repayment period will reduce your monthly payments, though it may increase the total cost due to interest.

  • Increase deposit amount: a larger upfront deposit will lower your monthly repayments and total interest paid.

What are the alternatives to hire purchase?

While hire purchase is a useful way to finance business assets with the aim of ownership , it's important to consider other financing options that may suit different business needs and situations. Below is a comparison table detailing alternatives to hire purchase:

Financing option

Ownership

Monthly payments

Ideal for

End of term options

Asset finance (loan)

Full ownership from the start

Varies based on loan terms and interest rates

Businesses looking to own assets outright while spreading the cost

Complete payments and retain ownership

Operating lease

No ownership, the asset is returned

Lower, covers only asset use

Businesses needing short term or specialised equipment

Return, extend the lease, or upgrade

Finance lease

No immediate ownership, there is an option to buy later

Higher, aims to cover full asset value

Businesses wanting to spread the cost and potentially own the equipment

Buy the asset, extend the lease, or return

Contract hire

No ownership, includes services like maintenance

Fixed, includes maintenance costs

Businesses needing fixed-term vehicles or equipment with maintenance

Return the asset, potential penalties for excess use

Hire purchase

Ownership transferred after final payment

Higher, contributes towards ownership

Businesses aiming for ownership with a predictable payment plan

Own the asset outright, or sell it back

How to find the best hire purchase deals with Capitalise

At Capitalise, we partner with over 100 UK lenders to help you find the best business finance solution. With one application, you can compare hire purchase offers from multiple lenders, ensuring you get the best deal for your business.

Here’s how to get started:

  1. Using our registration lookup, input the car's registration number, or the make and model of the vehicle.

  2. View the vehicle’s estimated value and potential monthly repayment options.

  3. Proceed with your application to receive quotes from several lenders through Capitalise.

Sign up for free today and find the hire purchase agreement that best fits your business.

Ready to get started?
Find and compare lenders today.

Frequently asked questions