HP stands for hire purchase. It’s also sometimes referred to as lease purchase. But most commonly it’s HP.
HP is often used by small businesses to purchase items such as cars, vans, and office equipment.
It’s a way of buying an asset (a car or van) over a period of time without purchasing all of it from the start.
It’s important to realise you don’t legally own the asset until you have paid back all the money you owe on an HP agreement.
An HP contract is made with a finance company – not the dealer from which you may be buying the car. The finance company owns the asset until the final payment is made.
How does HP work?
You pay an initial deposit. This is then followed by monthly payments over the agreed period. This includes the remaining money owing plus interest charged by the finance company. Usually this will be three or four years. At the end of the HP agreement you have the option of owing the goods on the payment of an agreed fee.
The finance company could take back the goods if you do not keep up repayments. However, if you have paid more than a third of the asset’s value this would have to be done via a court order.
What are the benefits of HP?
- Minimum cash outlay at the start – low deposits often available
- Fixed interest rate through the agreement
- Fixed repayments – makes cash flow and budgeting easier
- Freedom of a cash buyer with prearranged finance
- Ownership – at the end of the term, you own the asset for an agreed completion fee
- Interest charges can be offset against taxable profits and capital
- allowances can be claimed
- Option to defer VAT on purchases allows for improved cash flow
