When you need to fund a vehicle, machine or piece of equipment for the business, hire purchase is one of a few structures on the table, alongside a chattel mortgage and a finance lease. They can all fund the same asset, but who owns it, when, and how it hits your books can be quite different.
What hire purchase actually is
Under a hire purchase agreement, the finance company buys and owns the asset for the length of the contract. Your business hires it and makes regular instalments covering the asset’s value plus interest. Once every instalment is paid, ownership transfers to you, usually for a small nominal final payment. Until that point, you’re using the asset, not owning it.
How it compares to a finance lease
A finance lease works differently from the start. Instead of working toward ownership, you’re paying to use the asset for the lease term, and at the end you typically have a choice: make a final payment to take ownership, extend the lease, or hand the asset back. A finance lease can suit a business that wants flexibility about whether it keeps the asset long term, while hire purchase suits a business that already knows it wants to own the asset outright at the end.
How it compares to a chattel mortgage
A chattel mortgage sits at the other end of the spectrum. You own the asset from day one, and the lender simply holds a registered security interest over it until the loan is repaid, similar in spirit to a mortgage over property. Hire purchase, by contrast, has the financier holding legal ownership throughout the term, with you gaining ownership only once the final instalment clears.
Where the numbers get business-specific
GST treatment, depreciation and how each structure sits on your balance sheet all differ between hire purchase, chattel mortgage and finance lease, and the details depend on how your business is set up and how the asset will be used. This genuinely is a conversation for your accountant, because the best structure on paper for one business isn’t automatically the best for another, even when they’re financing an identical asset.
So which one should you use?
There’s rarely a single right answer. As a general starting point: if you want a clear, predictable path to owning the asset and don’t need the flexibility a lease offers, hire purchase or a chattel mortgage are usually the two worth comparing directly with your accountant. If usage and flexibility matter more than eventual ownership, or your business prefers a particular lease accounting treatment, a finance lease is worth putting on the table alongside them.
Financing a vehicle or piece of equipment and want to compare structures side by side? Call us on 1300 562 696 or get in touch and we’ll be back to you shortly.
Frequently Asked Questions
Who owns the asset during a hire purchase agreement?
The finance company owns the asset for the length of the agreement. Your business hires and uses it, and ownership only transfers to you once every instalment has been paid, typically for a small final payment.
What’s the difference between hire purchase and a chattel mortgage?
With a chattel mortgage you own the asset from day one, with the lender holding a security interest over it. With hire purchase, the financier owns the asset throughout the term and you only take ownership once the final instalment is paid.
Can I return the asset instead of buying it at the end of a hire purchase agreement?
Hire purchase is generally structured to end in ownership once all instalments are paid. If you want the flexibility to hand the asset back at the end of the term instead, a finance lease is typically the more suitable structure to compare.
Does hire purchase affect GST and tax the same way as other asset finance options?
No, GST timing, depreciation and balance sheet treatment differ between hire purchase, chattel mortgage and finance lease, and the right fit depends on your business structure. This is worth confirming with your accountant before you commit to a structure.
Disclaimer: This article is general in nature and doesn’t take into account your individual circumstances or business structure. It shouldn’t be relied on as financial, tax or legal advice. Confirm the GST and tax treatment of any asset finance structure with your accountant before you commit.
