A hire purchase is a contract for the hire of an asset under which the hirer (or lessee) has the option to acquire legal title to the asset, generally for a nominal sum, at the end of the agreed hire period.
The term of a hire purchase
Term is generally shorter or equal to the useful economic life of the asset. A hire purchase agreement, in addition to the option to purchase sum, may incorporate a ‘balloon payment’ at the end of the term. The repayment profile may also be structured to match the cash flows of the hirer’s business ie. seasonality.
Ownership of the asset
The legal ownership of the asset remains with ABN AMRO Lease (lessor), while the hirer has beneficial (“economic”) ownership until such time as the hirer exercises the agreed option to purchase. The hirer/lessee has no residual value risk and has the right to acquire legal title to the asset(s) by way of payment of the purchase option sum.
Insurance and maintenance of the asset
The hirer will usually be responsible for insurance and maintenance.
Advantages for the hirer
- The hirer can acquire the title to the asset at the end of the hire period
- 100% financing of the asset
- Predictable fixed monthly payments
- Flexible payment structures
- The asset is recorded on the hirer’s balance sheet