A commercial hire purchase (CHP) agreement is a type of vehicle finance where the financier buys the car on your behalf and hires it back to you over a set period of time. You make repayments towards the vehicle and can drive it, but don't own it until the end of the agreement (when you have repaid the full amount).
Commercial hire purchases could be a good loan option for business owners who want a new vehicle (or vehicles) but also need some financial flexibility.
How does a commercial hire purchase car loan work?
As the name suggests, this is a commercial financial product for businesses. This includes sole traders, partnerships and companies.
Due to the nature of the loan, it is also referred to as a "corporate hire purchase" or "offer to hire". During the loan term, the borrower is not the owner of the car and although they have use of the car, it is only transferred to their ownership when they finish making payments. That is after the total price of the vehicle has been repaid, including any interest charges.
This is a flexible loan contract and one that is usually placed on a fixed interest rate. The borrower is able to identify the real cost of the car since monthly repayments are fixed. Some lenders will require a deposit or down payment, while in other cases trade-ins may be used.
Pros and cons
Pros
- Tax deductions. You can claim depreciation and interest charges on the contract. If you use the vehicle for business, you may also be able to claim GST credits.
- Flexible repayments. Commercial hire purchase contracts may range from 1 to 5 years, which means you can choose a term that suits your finances. You may also have the option of balloon payments to help manage your loan according to your cash flow.
- Automatic ownership upon repayment. The vehicle is automatically transferred to the hirer for ownership upon completion of payment.
Cons
- You don't own the car. During the commercial hire purchase agreement period, you are the hirer and not the owner of the car. So defaulting on repayments may cost you the car.
- It can be expensive. Commercial hire purchase agreements may be more expensive than commercial car loans or other more popular car finance options. The minimum loan amount may also be higher.
- Lower vehicle value when you own it. The value of a vehicle depreciates from the time it is purchased, so at the end of the hire purchase agreement the car will be worth less than when you first started driving it.
How to compare commercial hire purchase vehicle loans
Interest rates
You need to compare the interest rates with any loan you take out. Different lenders will offer different rates and this contributes to the overall cost of the loan.
Repayment flexibility
Hire purchase loans are normally repaid with fixed monthly payments. You need to find out how flexible the lender will be when it comes to your repayments and whether you will be allowed to adjust your monthly payments.
Loan features
Not all lenders require down payments and some will be willing to take a trade-in as your deposit. Compare the loan features that different lenders offer and evaluate them to find one that is most suitable for your needs.
Fees
What are the fees you would be looking at with different lenders? Note that you will not be charged GST on your monthly or residual payment.
What to watch out for
- Defaulting. Remember that you do not own the car, so the implications of defaulting on payments may cost you all the other payments you’ve made. If you keep defaulting on payments, the financier may decide to take back their car.
- High debt. Again, you don’t own the car until you fully settle the loan amount and interest. It’s therefore important to make smart financial decisions when it comes to the choice of car. The choice is yours and you might want to consider going for a car that is well within your budget. You need a loan that is manageable.
How to apply for commercial hire purchase car loan
Companies, partnerships, sole traders and individuals are all eligible for commercial hire purchase car loans. However, the car needs to be for business use or income purposes. Before you can apply for a commercial hire purchase car loan, it’s recommended that you use the comparison table on this page to compare what different lenders are offering. You can click on the lender’s link to access their website for more information.
You can choose to apply for the loan online, which is convenient, or physically at the lender’s offices. With both application methods, the lender will require that you fill out an application form and supply personal and financial details.
Use our Hire Purchase Calculator
Compare of car loans vs hire purchase
We don't compare hire purchase leases, below are a range of commercial car loans you can compare to decide what type of finance is suitable for your business' needs.
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