Commercial hire purchase

Commercial hire purchase car loans help you acquire the car of your choice on a repayment schedule that you can afford.

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Commercial hire purchase (CHP) loans allow you to make monthly instalments towards the purchase of a car, while at the same time allowing you to use the car. The difference between this car loan and others is that the financier purchases the car on behalf of the customer, then hires it back to the interested buyer until all loan payments are completed. Although the customer can use the car, he or she is not the real owner of the car.

Hire purchase could be a good loan option for business owners as they don’t have to tie down funds into buying a car, but can easily make manageable monthly payments.

How does a commercial hire purchase car loan work?

As the name suggests, this is a commercial financial product and the applicants for such a loan would be businesses. This includes sole traders, partnerships and companies. Due to the nature of the loan, it is also referred to as corporate hire purchase or offer to hire.

During the duration of the loan term, the borrower is not the owner of the car and although they can use the car as they wish, the car will only be 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.

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.

Pros and cons

Pros

  • Tax deductions. The borrower, who is also the hirer in this case, can claim depreciation and interest charges on the contract. Your monthly rental and residual payments are also not charged GST.
  • Flexible repayments. Hire purchase repayments tend to be quite flexible. The loan contracts are flexible and may range from one year to five years. Although the monthly repayments are fixed, you have the option of balloon payments which help you 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. Throughout the duration of the loan, you are the hirer and not the owner of the car. Defaulting on repayments may cost you your payments.
  • It may not be cheap. Hire purchase loans are just like car dealer loans in that they could be expensive when compared to ordinary personal loans.

Things to avoid before applying

  • 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 a 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 compare what different lenders are offering.

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.

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