Hire Purchase vs Lease - Which Is Right For You?

Hire Purchase

If you’re wanting to eventually purchase a business vehicle, but you don’t have the capital on hand to do so immediately, a hire purchase could be a great option for you. A hire purchase means that you’ll pay the car off in instalments (these are often monthly repayments, but depending on your lender you might have the option to make weekly or fortnightly payments instead). At the end of the repayment period, you’ll have complete ownership over the car. In most cases, you’ll have to make an initial deposit payment, followed by your regular repayments. 

Advantages

You’ll end up owning your vehicle at the end of the loan period

With a hire purchase agreement, the money you’re paying each month to use your business vehicle will be paying off the loan amount. This means that by the end of the loan period, the car will be entirely yours. By contrast, with a lease, you’ll also make regular repayments, but you’ll never actually own the vehicle.

Spreading out the cost of the vehicle

If you’re not in a financial position to be buying a car for your business outright, a hire purchase agreement could be a great way for you to spread the total cost of your vehicle over a few years. Plus, all of the lenders that Driva works with offer fixed rates, so the amount you’ll pay each month will stay the same (making it much easier to budget and plan for the future). 

Flexible repayment terms

Depending on which lender you choose to go with, you’ll probably have some degree of flexibility over your repayment terms. This might be the length of the loan (often between 1 and 7 years) or whether you make your repayments weekly, fortnightly or monthly.

Drawbacks

You’re responsible for maintenance and insurance of the vehicle

Since the vehicle is technically yours from the very beginning, you’re responsible for any maintenance, servicing and insurance that the car requires, just like if you had bought it outright. 

You’ll end up paying more overall

The downside of a hire purchase is that you’ll incur a number of fees and charges along the way, which might include a set-up fee, deposit or interest. This means that you’ll end up paying more than if you had bought the car outright. However, if you don’t want to commit to paying a large sum upfront, then this may not be a major concern for you.  

If you can’t meet your repayments, you’ll likely lose the vehicle

The final major drawback of a hire purchase is that, like with any secured loan product, if you default on your repayments, your lender may repossess the vehicle in order to cover their losses. 

Lease

Alternatively, if you just want to use a business car for a set amount of time, or buying a business vehicle just isn’t a viable financial option for you, then a lease could be the best option for you. In the car finance world, a lease is essentially borrowing money with a contract.

There are two main types of leases that you can obtain. A finance lease transfers the risk of ownership to the lessee, without transferring actual legal ownership. The lessee will also often have the option to purchase the car at the end of the lease period. By contrast, an operating lease is a typical type of rental agreement, but the lessee will not have the opportunity to purchase the car at any point during the period of the lease. An operating lease is normally more appropriate for shorter-term leases, and a finance lease will likely suit customers who are looking for a long-term lease. 

Advantages

You’re not responsible for maintenance

Because you’ll never actually own the asset, you’re not responsible for any maintenance or servicing that the car might require. This means you’ll be able to save some money on these expenses, and perhaps use that money to improve your business in other ways

Ability to continually upgrade your vehicle

One of the main advantages of leasing is that you’re not tied to any asset, so you’re able to upgrade your vehicle at the end of the lease, should you wish to. If having the latest technology is important to you, or if you’re always looking to improve your business car, then getting a lease is probably a great option for you. 

More affordable than a hire purchase

Finally, entering into a lease agreement is normally cheaper than a hire purchase arrangement, because you’re just paying to use the vehicle for a period of time and won’t end up actually owning it.

Drawbacks

You’ll never own the asset

If you’re wanting to eventually own a business vehicle, a lease agreement might not be the best option for you, because you’ll never end up actually owning the vehicle. The nature of a lease means that you’ll pay to use the vehicle for a set period of time before you have to return it. 

Higher insurance costs

Another drawback is that you might incur a higher insurance cost with a lease than with a hire purchase. It’s important to consider seemingly smaller costs like insurance as they can add up over time. 

Main factors to consider

There are a number of factors to consider when you’re deciding between a hire purchase or a lease:

Frequency of use

If you’re only going to require the car for a short period of time, or you think you’ll probably want to upgrade to a different vehicle after a couple of years, it would probably make the most sense to get a lease rather than a hire purchase. 

Be aware of any restrictions

Sometimes lease agreements have restrictions on things like the amount of use, typically calculated by a restriction on mileage. It’s important that you consider how you’re going to be using the vehicle before you decide on a lease or hire purchase. 

Fees and charges

It’s also important to consider any fees and charges that you’ll need to pay with either a hire purchase or a lease, and factor these into your budget. Fees and charges will vary between lenders, so make sure you consider these carefully when you receive your personalised quotes through Driva’s smart online financing platform. 

Overall costs

It’s also important to note that monthly repayments for hire purchase tend to be higher than for a lease (because with a hire purchase you’ll end up owning the vehicle). However, with a hire purchase agreement you’ll be able to claim depreciation costs. Additionally, because you’ve presumed ownership of the vehicle, you’ll also be able to apply for the instant asset write-off scheme

Tax effectiveness

If you’re buying your vehicle for business purposes, you’ll likely have considered the tax implications of a lease vs hire purchase. Leased assets are normally viewed as an operating cost, and can be tax-deductible. Hire purchase assets typically are listed as an asset on your balance sheet and are eligible for the instant asset write-off scheme. This is because hire purchases are treated in the same way as a stand-alone sale within a tax period. Make sure you talk to your accountant to find out which is the most tax effective decision, if this is a concern for you. 

Learn more: A Quick Guide On The Most Tax Effective Way To Buy A Car

Consider the future of your business

Finally, make sure you consult your business plan and consider the future of your business and how long you’re going to need this vehicle for. Think about not only what you need to operate in the short-term, but what you’ll need to grow your business in the future. 

Summing up

Both hire purchase agreements and leases agreements can be great options if you’re looking to use a business vehicle but aren’t looking to buy it outright (or at all!). Understanding how each finance product works, and the advantages and drawbacks of each, is crucial to ensuring that you make the right decision for your business and financial requirements. No matter what your vehicle requirements are, Driva is excited to help you finance your new set of wheels and take your business to the next level. 

If you have any queries please get in touch today with one of our commercial vehicle finance experts on 1300 755 494 or email us at hello@driva.com.au and we can help find the best finance option for your small business. Or, if you are ready to get started now, you can apply online using our simple platform here. 

Maddie Barclay

Maddie is the Marketing Coordinator at Driva and our resident blog writer on all things car finance. When she’s not discussing the ins and outs of vehicle loans, you can probably find her at the beach or spending time with family and friends. 

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