9.8 Hire purchase

Question 1

What is meant by “hire purchase”?

Answer 1

An installment plan or arrangement for financing capital goods whereby the assets are hired with the option to purchase by paying an initial installment and replaying the balance plus interest over a period of time.

Question 2

What are the advantages of a hire purchase agreement?

Answer 2

• usually a fixed term and deposit that fits the budget
• usually flexible (e.g. length of term)
• interest rates and monthly payment are fixed throughout the agreement, making financial planning easier.
• assets are treated as an outright purchase, and so tax deduction is provided through capital allowance.

Question 3

What are the disadvantages of a hire purchase agreement?

Answer 3

• assets may be repossessed by the lender if the buyer defaults on payment
• total cost of the asset over the fixed term will be greater than buying it upfront.
• hire purchase may tempt buyers to buy extravagant goods

Question 4

How is a finance lease different to a hire purchase?

Answer 4

In a finance lease, the lessee does not have the option to purchase the goods or equipment.