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Hire Purchase
Hire Purchase (HP) is a well-established method of financing the purchase of assets by businesses. Under an HP agreement the customer will pay an initial deposit, with the remainder of the balance and interest paid over a period of time. The finance company which provides finance is known as the "creditor". It will purchase the asset on behalf of the customer, who is known as the "hirer" The finance company owns the asset until the final installment is paid for the asset.
Benefits of Hire Purchase
- The assets can be used immediately whilst allowing repayments to be staggered, giving companies a better cash flow
- HP agreements are easily negotiated and available
- The most up to date technology can be hired and used to increase company productivity and efficiency
- The hirer can recover the writing down costs and VAT on the assets
- There is a clearly defined financial commitment from the outset
- Security is on the transaction that has been financed thus requiring no additional commitment from the customer
- HP is not repayable on demand unless the customer defaults on the agreement
Leasing
Leasing is a contract between the leasing company, the "lessor", and the customer, the "lessee";
- The leasing company buys and owns the asset that the lessee requires
- The customer hires the asset from the leasing company and pays rental over a pre-determined period for the use of the asset.
- The leasing company can sometimes claim capital allowances on the assets. These benefits are usually passed onto the lessee in the form of reduced repayments.
Finance Leases
Under a finance lease the rental covers virtually all of the costs of the asset, therefore the value of the rental is equal to or greater than 90% of the cost of the asset. The leasing company claims written down allowances, whilst the customer can claim both tax relief and VAT on rentals paid.
Lease Purchase
A lease purchase is essentially the same as HP; the main difference is in the terms and structure of repayments. Some finance companies differentiate Lease Purchase from Hire Purchase by using it where the customer wishes to defer payment of a substantial part of the asset cost until the end of the agreement.
Car Finance Personal Contract Purchase [PCP]
PCPs normally operate for two years; at the beginning of the period the customer will pay a deposit and have set monthly repayments. At the end of the contract there are three options facing the customer:-
- Start the process all over again by going back to the dealer, trading in the car and paying off the Minimum Guaranteed Future Value [MGFV] to the finance company. Any surplus can then be put towards the deposit on a new car. Alternatively, the car can be sold privately, keeping any surplus in excess of the MGFV.
- Return the car and walk away. If the market conditions have changed and the car is worth less than the MGFV, the lender will absorb any loss. Provided the vehicle is in good condition for its age and does not exceed the agreed mileage.
- Keep the car by paying off the MGFV. Even if the vehicle is worth more, the customer only has to find the agreed Minimum Guaranteed Future Value set at the outset of your finance plan.
Both new and used vehicles can be purchased on a PCP plan.
Hire Purchase
Traditional HP is similar to Conditional Sale, except the customer hire the vehicle for a fixed period during which time they repay, by installments, the total cost of the car plus interest. At the end of the contract period, the customer may elect to pay a nominal ‘option to purchase' fee to obtain ownership of the vehicle.
Personal Leasing
Following the Value Added Tax changes in August 1995, the motor finance industry developed Personal Leasing Plans [PLP]. This is a new development for the car finance market and will probably take several years to take off.
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