What is hire purchase? How it works for business vehicles and equipment

Hire purchase is a type of credit agreement in which a business agrees to buy an asset from a lender over a set period. After paying a deposit, the business hires the asset from the lender for the length of the agreement and makes fixed payments. That is the British Business Bank’s description, and it captures the two halves of the name: you hire first and purchase at the end.

It is one form of asset finance, used to spread the cost of something the business will keep and use for years. This guide is general information for UK businesses, not legal or tax advice.

A hire purchase agreement runs in three stages: a deposit, a period of fixed payments, and the transfer of ownership at the end.

• Deposit. You pay part of the price at the start. The lender buys the asset and you take delivery and use it.
• Fixed payments. You pay the rest, plus the lender’s charges, in instalments over the agreed term.
• The end of the agreement. You either own the asset or have the option to buy it outright with a final payment. A fee may be payable to take title, so ask what it is before you sign.

The agreement also sets out what you must do with the asset while the lender owns it, such as keeping it insured and maintained, and what happens if a payment is missed. The amount of the deposit, the length of the term and the charges are for each lender to set, subject to status and lender criteria.

The lender owns the asset until the agreement is completed. The legal definition in the Consumer Credit Act 1974 says the same thing in older language: the goods are hired in return for periodical payments, and ownership passes if the terms of the agreement are complied with and an event such as the exercise of an option to purchase occurs.

Until that point, the asset is yours to use and the lender’s to own. In practice that means:

• You cannot normally sell it or offer it to another lender as security, because it is not yours.
• The lender’s security is the asset itself.
• If the agreement ends early through default, the lender may be entitled to take the asset back.

That makes hire purchase different from security over the business as a whole. A debenture gives a lender charges over a company’s assets generally, while a hire purchase agreement concerns one asset that the lender already owns.

The principal difference is who owns the asset. Hire purchase is a route to owning it, while a lease pays for the use of an asset that stays with the finance company.

Choose on what you want at the end, not on the monthly figure alone. If you will run the asset until it is worn out, ownership has value. If you replace equipment often, paying towards ownership you will not use can be the dearer route.

Hire purchase is used for physical assets that hold some value and can be identified, such as vehicles, plant and machinery. Each lender decides which assets it will fund, and at what age and condition.

• Hauliers and couriers use it for trucks, trailers and vans. See transport and logistics finance.
• Contractors use it for excavators and other plant. See funding for construction businesses.
• Manufacturers use it for production machinery. See finance for manufacturers.

Things with no resale value, such as software licences, are harder to fund this way because there is nothing for the lender to own.

It depends on who is borrowing and how much. Lending to limited companies falls outside the Financial Conduct Authority’s consumer credit rules, while business lending of £25,000 or less to sole traders and small partnerships falls within them.

The exemption comes from the Regulated Activities Order, which exempts credit exceeding £25,000 taken wholly or predominantly for business purposes. This is a general description, not legal advice. Ask the lender whether your agreement would be regulated, because the protections you have depend on the answer.

For capital allowances, a business buying an asset on hire purchase is treated as its owner, even though the lender still holds title. GOV.UK says that when you start using the item you can claim for all the payments you will make under the contract, but not for the interest.

• Annual Investment Allowance. The allowance is £1 million and is open to sole traders, partnerships and limited companies. Cars do not qualify.
• Changes in 2026. A 40% first-year allowance applies to new and unused main rate plant or machinery, other than cars, bought on or after 1 January 2026. The main pool writing down allowance fell from 18% to 14% on 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax.
• VAT. HMRC’s guidance generally treats goods supplied on hire purchase like an outright sale, with VAT on the goods due at the outset and the tax point in most cases at delivery or collection. Where the optional final payment equals or exceeds the asset’s expected market value, the contract is treated as leasing and each instalment carries VAT.

The main risk is that you lose the asset and the money already paid if you cannot keep up the payments. Fixed instalments do not fall when trade does, and the asset is often the thing the business earns with.

• Total cost. The instalments include the lender’s charges, so you pay more than the cash price. Compare the total repayable, with every fee, not the monthly figure.
• Ownership comes last. Treating the asset as yours before the agreement is completed causes problems if you try to sell or refinance it.
• Early settlement. Check what it costs to settle early and whether you save any charges by doing so.
• Running costs. Insurance, servicing and repairs are usually yours from the day you take delivery.
• Other security. A lender may ask a director to guarantee the agreement. Read what a personal guarantee puts at risk before you agree.

Ask for the total cost and the end-of-agreement terms in writing before anything else. Dealer finance, a bank and a specialist asset lender can quote the same asset very differently, so put the same questions to each:

• What is the deposit, and what is the total amount repayable including every fee?
• Is there a fee or a larger final payment to take ownership?
• Is the rate fixed for the whole term?
• What does early settlement cost?
• Is any guarantee or other security required?
• Would this be a regulated agreement?

Our guide to comparing business lenders’ offers explains how flat rates and APRs differ, and the directory of UK business lenders shows what each provider publishes about its own terms.

Capzy is a credit broker, not a lender, and gets paid by the lender. We introduce businesses to lenders that fund vehicles and equipment, and the lender decides whether to offer hire purchase and on what terms.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and all funding is subject to status and lender criteria.