Commercial hire purchase

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

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Commercial hire purchase, also known as a hire purchase loan, allows 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. Although the customer can use the car, he or she is not the real owner of the car until all loan payments are completed.

Hire purchase could be a good loan option for business owners as they don’t have to tie funds down into buying a car, but can 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 at times referred to as corporate hire purchase. 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 works on a flat interest rate scheme. Depending on the lender, you may receive financing for up to 100% of the market valuation or purchase price of the commercial vehicle. However, most hire purchase loans are capped at a quantum of 70% to 80% with a maximum tenure of seven years. This means that a 20% to 30% down payment will be required.

How to calculate your repayments for a commercial hire purchase car loan

For this example, we’ll assume that you take out a new vehicle that has a purchase price of $100,000 over 5 years. Your lender allows a maximum of 80% loan quantum, which means that you need to pay an upfront sum of $20,000. Assuming that the interest rate for the commercial hire purchase is 3.9%, you will incur an annual interest rate of $3,120 for the borrowed sum of $80,000. Over 5 years, you would have incurred a total of $15,600 in interest, bringing the total cost of your vehicle to $115,600.

To calculate your monthly repayments:

[$80,000 (loan quantum) + $15,600 (total interest)] / 60 months (loan term) = $1,593.33

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.

Pros and cons

Pros

  • Tax deductions. With the car as a business tool instead of for personal use, it allows you to write off taxes and expenses.
  • Ease of cash flow. If you’re a business owner, having sufficient capital to keep your business going is of critical importance. With a hire purchase loan, your funds won’t be tied up so you can consider expanding or budget for growth.
  • 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 come with significantly higher interest rates compared to normal car loans – generally 1% to 2% more.

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 repossess 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 and is covered by commercial motor insurance. Before you can apply for a commercial hire purchase car loan, it’s recommended that you compare what different lenders are offering.

For commercial hire purchase car loans, lenders generally require you to contact them directly to apply. The lender will then require that you fill out an application form and request that you supply the necessary personal and financial details.

Picture: Shutterstock

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