Sunday, September 25, 2011

Hire Purchase: What is it and Which are the benefits

Hopefully you are trying to budget and save each week, spending less than you earn and exercising new found financial responsibility in these economically volatile times. However, sometimes it just seems downright impossible to save for everything we want and need, like a car for example. Saving up the entire purchase price of a new car which suits your business, family or personal needs means a lot more years spent waiting for the bus in the rain.

However, there is an alternative to a high interest rate, unsecured personal loan when you want to get into a new car, and that is using a hire purchase contract.

What is Hire Purchase?

A hire purchase agreement is a type of lease, where you can take possession of a car by hiring it over the repayment term and when you make your final payment of the term, the title of the car is transferred to you. As a result, you are not the owner of the car until you have made all payments on the repayment schedule, however, you can still claim the depreciation of the car and the interest on the loan repayments as tax deductions if you are using the car for work.

The hire purchase agreement has a balloon amount included in the contract, which is the amount you will have to pay to the finance provider at the end of the hire purchase agreement term. With a balloon payment to make at the end, your monthly repayments are lower because you are not making repayments on the full purchase price, but instead on the purchase price less the balloon amount as your finance provider will get back that amount at the end.

Having a balloon in the hire purchase contract does mean you need to have some way to come up with that payment at the end of the term, and balloon payments are usually covered when you sell the car at the end of the term to upgrade to the next model. That is why it is important you choose a balloon amount which is less than what the car will be worth at the end of the term. At the same time, you don’t have to choose a hire purchase agreement with a balloon amount.

A hire purchase is ideally suited to people in business who can claim the expenses of the hire purchase agreement on tax. To be able to claim your vehicle as a business vehicle it needs to be used for work more than 50% of the time.

Benefits of a Hire Purchase

If it sounds like you would be suited to using a hire purchase agreement to get yourself into your next new car sooner, consider the other benefits available to you:

  • Your choice of term. You can choose a hire purchase term from 12 months up to 60 months.
  • Fixed low interest rates. The interest rate on your hire purchase can be fixed for the entire term which means your repayments will stay the same and can be easily budgeted for. You’ll also qualify for lower interest rates because the lease is secured against the car which remains the legal property of the finance company until the end of the lease, therefore providing better security than a standard personal car loan.
  • No GST. There is now GST charged on the monthly hire purchase repayments, but if your business is registered for GST you can still claim the GST which is included in the purchase price of the vehicle.
  • Guaranteed funding. With a business overdraft you can be required to repay the amount you’ve borrowed on demand of the bank. However, with a hire purchase you are guaranteed that a hire purchase agreement can’t be withdrawn for the term of the agreement.
  • Finance the entire cost. With a hire purchase agreement you can obtain finance for the entire cost of the vehicle including any extras or accessories you choose. While a deposit may be required on the hire purchase, you can also usually use other business assets to raise this amount.

Tax Advantages of a Hire Purchase Agreement

If you are a sole trader and your business uses the accrual method of accounting, you can claim the GST in the vehicle purchase price and over the hire purchase agreement as a lump sum when you lodge your next BAS. If you are a sole trader who uses the cash accounting method you can claim the GST evenly over the term of the hire purchase agreement. The balloon repayment amount is never subject to GST.

Even if you are not registered for GST, the company providing your hire purchase lease can claim capital allowances and pass on the benefits to you in the form of a reduced rental cost.

Alban Smith is a recognised personal finance writer with 3 years experience writing for financial blogs. When he is not contributing, Alban writes guides and articles on how to compare car loans

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