Hire Purchase & What You Need To Know!
A Commercial Hire Purchase (CHP) is a commercial finance product where the customer hires the vehicle from the financier for a fixed monthly repayment over a set period. Commercial Hire Purchase can also be known as a Corporate Hire Purchase, Hire Purchase or Offer To Hire, and is often abbreviated as CHP or HP.
How does a Hire Purchase work?
Under a Commercial Hire Purchase arrangement, the financier agrees to purchase the car on behalf of the customer, and then hire it back to them over a set period, generally between 1 & 5 years. The customer has the use of the vehicle for the term of the contract but is not the owner of the vehicle, the lender is. At the end of the contract term when the total price of the vehicle (minus any balloon) and the interest charges have been paid in full, the customer takes ownership of the car.
Benefits of a Commercial Hire Purchase
Flexible contract terms ranging from 1 to 5 years
Balloon value (balloon or final instalment) may be placed on contract
Fixed interest rate for the term of the loan
Monthly repayments are fixed
Costs are known in advance
Deposit (either cash or trade-in) may be used
A tax deduction is available when the vehicle is used for business purposes
GST is not charged on the monthly rental or balloon payment (but is charged on fees and interest)
Customers registered for GST can claim the GST in the vehicle price, plus fees and interest
The finance is secured against the vehicle, allowing lower interest rates
Who does a Commercial Hire Purchase suit?
A Commercial Hire Purchase may be suitable for business (including companies, partnerships and sole traders, and some individuals) who account for GST on either an Accruals or Cash basis, the goods must be used predominantly for business use, which means greater than 50% Prior to 1 July 2012, Commercial Hire Purchase was commonly used by individuals receiving a car allowance and using their vehicle predominantly for business purposes, which means greater than 50%. However, due to changes to the GST treatment of CHP that came into effect on 1 July 2012 a CHP is now significantly less attractive in this circumstance, and employees with a car allowance may wish to consider other finance options.