Hire purchase explained

The monthly payments include both the repayment of the loan amount and the interest charged by the lender, and the total cost of the loan will be higher than the purchase price due to the interest charged. Hire purchase agreements can be useful for people who want to acquire assets but do not have enough funds to purchase them outright.

Representative example

Let's say you want to purchase equipment for £20,000, and you make an initial payment of £4,000. The remaining balance of £16,000 is then spread out over 36 months with an interest rate of 10% per annum. The monthly payment would look something like this:

• Loan amount: £16,000
• Interest rate: 10% per annum
• Loan term: 36 months
• Monthly payment: £485.31

This payment would include both the repayment of the loan and the interest charged. The breakdown of the payment would look like this:

• Principal repayment: £444.44
• Interest charge: £40.87

Keep in mind that this is just a representative example and the exact terms of the hire purchase agreement would vary depending on the lender and the specific terms agreed upon.

Before entering into a hire purchase, there are several factors you should consider.

Pros of Hire Purchase

• Flexibility: Hire purchase agreements often come with flexible terms and conditions, allowing you to choose a repayment plan that suits your budget.
• Opportunity to own the asset: With a hire purchase agreement, you have the option to own the asset at the end of the agreement by paying the final balloon payment.
• Regular payments: Hire purchase agreements typically involve regular payments, which can help you budget and manage your finances more effectively.

Cons of Hire Purchase

• Higher cost: Hire purchase agreements often come with higher interest rates compared to other forms of financing, which can make them more expensive in the long run.
• Balloon payment: The final balloon payment at the end of the hire purchase agreement can be a significant amount, which may be difficult to pay if you haven't budgeted for it.
• Limited flexibility: Once you enter into a hire purchase agreement, you may not be able to change the terms or make early payments without incurring penalties.