Hire purchase or commonly called as leasing. It is a type of asset financing that allows businesses or person to possess and control an asset. It has an agreed term while paying for the rental or installment of the purchase. The platform includes the depreciation and interest.
Moreover, the Hiring Purchase fits for a business who want to purchase assets but unable immediately pay the full cost. The purchaser will pay the initial deposit. While the remaining balance and the payment of interest is over a specified period. When the remaining balance amount is paid completely, the purchaser will ultimately own the asset.
Assets are anything that has monetary value under the ownership of a company or an individual.
Furthermore, the Leasing asset financing will differ from term lending wherein the lessee does not have ownership rights to the asset. When the lease contract will end, the lessee can opt to extend the lease, return the asset, or deal the asset to a buyer. Hence, some leasers can opt to refund of 95% of the sale proceeds if they sell to a direct buyer. Typically, the refund amount will depend on the contract between the original leaser and lessee.
How does Hire Purchase Agreements Work?
Remember that Hire purchase or leasing asset financing agreements are similar to rent-to-own transactions. The deal will give the lessee the option to buy at any time during the contract like the rent-to-own cars. Like rent-to-own, hire purchase is useful and beneficial for individuals that have a poor credit score. The individual can be capable of paying the credit by spreading the cost of the item over an extended period. It is not like an extension of credit. Even though the purchaser technically doesn’t own the piece until the latter completes all of the payments.
The purchase plan offers protection to the vendor other than the sales and leasing. It is because the transfer of the ownership can happen when the agreement ends. Henceforth, the establishment of the security policy is part of the deal. The vendor can quickly repossess the asset if the buyer is unable to keep up with the repayments.
When getting a hire purchase agreement, consider the following costs:
The interest rate is a charge for financing.
There are favorable assets like machinery, agricultural equipment, and vehicles that finance will give higher resale value. Moreover, there are soft purchases that are known for low resale value. The examples of low resale value are printers, vending machine, and office furniture.
The charging fees
There are charge fees that a financing company establishes for loan processing and administrative work conditions.
- Hire Purchase will allow the company to control and deploy assets without significant utilization on operation funds
- Budgeting becomes easy for the lessee because of the Fixed-rate funding. The lessee can always have a clear sight of future expenditure
- The flexible structure of the repayment scheme is available. It allows seasonal business for one repayment in a year. In this way, there is a reduction of monthly outlay. It is through factoring in a ‘balloon’ payment at the end of the term
- Hire purchase prevents the risk of an asset’s value to depreciate rapidly. It is by providing flexibility for the purchaser to enter into a new contract when the term ends.
- Financing asset acquisitions are tax efficient than standard-term loans. It is because the lease payments are listed as expenses. Although the asset depreciation also provides tax benefits, the functionality of the asset will vary depending on the extent of usage and regulation of use
- leasing asset financing can easily be accessible for businesses because the creditor and the credit can be secure since the asset is under the ownership of the financing firm.
- In some cases, depending on the financing, there are certain conditions the terms of the agreement will include the maintenance of the assets.
- The total sum of capital payments for hire purchase or leasing is higher than the full amount on the asset you will purchase
- The administrative procedures are complicated and costly whenever, in any case, there will be covenants that will apply to the terms of the agreement. Some of the examples are updates on change of equipment locations
- In instances that the business will change or reform its strategy that will result in the asset to be no longer useful, there can be early termination charges or restrictions on subleasing.