What is a Hire Purchase?

Mary McMahon
Mary McMahon

A hire purchase is an arrangement where a person retains the right to use property with a series of monthly installments, but does not actually own it. At the end of the contract, title passes to the user. Such arrangements originated in the United Kingdom and are used in many other regions of the world. They are also known as rent to own contracts, referencing the idea that the user essentially rents the item with the payments, with the goal of eventually taking title once the contract is finished.

Man climbing a rope
Man climbing a rope

There are a number of reasons for people to use a hire purchase agreement. For companies and individuals needing new equipment, it may not be possible to buy the equipment outright, and credit can be costly. A hire purchase agreement allows people to take possession with a down payment and use the equipment as long as they make the installment payments. It can be used for creative bookkeeping, as rather than having to declare the up-front cost of the asset as an expense, it is possible to move the installment payments around on the books to reduce the appearance of expenses.

The company providing the equipment on lease owns the equipment and retains the right to take it back if the user does not make the installment payments. When the equipment is repossessed, it can be refurbished and rented out to another party. For companies using hire purchase agreements, the agreements provide a way to make money in a series of steady payments during the lease, generating a dependable positive cash flow, and if a problem develops, they still own the equipment and can lease it out to someone else.

One potential disadvantage of a rent to own agreement is the possibility that the equipment will be obsolete by the time the contract is finished, requiring people to start all over again with a new contract. The length of a hire purchase agreement varies, depending on the equipment, the cost, and the terms negotiated by the people involved. The possibility of obsolescence is something people should consider when developing an agreement, as the value of the equipment will be reduced at the end of the contract and it may not be possible to sell it to recoup the investment.

Terms in a hire purchase agreement vary and may be negotiable, especially in a deal involving valuable equipment or a large amount of equipment, like a hire purchase agreement for medical equipment at a hospital. Getting quotes from several companies is recommended, as is reviewing the contract carefully and discussing any concerns and issues before signing.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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