There are many benefits and features to why businesses and individuals decide to enter a hire purchase agreement. A hire purchase agreement is a contract agreement between a person or business supplying the equipment (the financer) and the person intending to hire the equipment (the hirer). A business choosing to enter a hire purchase agreement can generate short-term revenue which assists in paying off the instalments. This Business Kitz blog will discuss the advantages and disadvantages for both parties entering a hire purchase agreement.
What are the advantages of hire purchase agreements?
Certainty and security
By entering into a hire purchase agreement there is a lot more certainty and security for both the hirer and the financer. It is not like a traditional lease and you can negotiate the price of the fixed asset, which protects both parties, and guarantees payment. This also protects the financer and their equipment by allowing them to repossess the equipment if payments fail to go through.
Low initial financial commitment
By entering a hire purchase agreement, it allows businesses to purchase expensive assets without significantly affecting their financial status. This is an effective business strategy, especially for startups and medium to small-scale companies, as these businesses may not have the financial security of incoming profits and may struggle with all the costs involved when owning and operating a business. Therefore by entering into a hire purchase agreement, businesses can have the equipment instantly delivered and available for immediate use; by making small rental payments with the money earned from the asset hired over an extended period of time until they make the final payment.
The advantages of hire purchase agreements are that they commonly have fixed rental payments for the duration of the agreement. This means that for the period of the lease agreement the hire charge is fixed and cannot change, regardless of if the bank makes any changes.
Purchase of better quality items
Another hire purchase advantage is that it enables all the expenditures to be spread out; giving the business the flexibility to purchase better quality products that may have previously been financially unattainable. If the payment for the equipment does not have to be paid in full, the business can acquire assets that are of better quality as the larger payment can be spread out over a long period of time.
Traditional loans are often restrictive of what the lessor can do during the lease. They may be subject to hidden or additional costs, or loss of security deposits if the terms and conditions of the agreement are not met. This doesn’t apply to hirers as they can use the equipment as their own.
Reduced GST tax
Businesses are also able to have the tax benefit of being able to claim GST credit from the Australian Taxation Office for GST in the price of equipment for a hire purchase agreement that was signed and dated on or after July 1st 2012. Hire purchase agreements are also not like traditional loans in the way that it does not deduct a monthly tax that is usually included in leases. This is because most financers usually include and combine the sale tax charge and other upfront taxes in the agreement.
What are the disadvantages of entering into a hire purchase agreement as the lessee?
Hire purchase finance is usually fixed, which can be an advantage but can also be a disadvantage if the interest rates drop, as you are not eligible. It also means that if you find yourself in any financial difficulty and unable to make the rental payment during the term of your agreement, you are at risk of losing the asset or damaging your credit score.
The hire purchase system works because the way lease financing works, you end up paying more for the equipment compared to if you were to purchase the item instantly and pay the cash price. This is due to the substantially high-interest rates. This is also dependent on the duration of the hire purchase, the longer it goes for, the more interest payable. If the hire purchase is for a large amount, such as hire or expensive and important assets, this is justifiable, but if it’s not, it’s important to consider if a regular hire purchase transaction is necessary.
Ownership rights pass
You also do not legally own the equipment in a hire purchase until you officially pay the last payment of the agreement. This allows the hirer the right to repossess the hired asset if failure to pay repayments occurs. There is also the disadvantage of the asset depreciating quickly before the last instalment is even paid.
If you are considering entering a hire purchase agreement and have any concerns about a typical transaction for either party involved, our team at Legal Kitz can assist you! Our sister company Legal Kitz can provide you with advice that is tailored to your situation. You can book a free 30-minute consultation with our experienced and highly qualified team via our website now.