What is hire purchase?
Hire purchase (HP) is common in the UK, Africa, India and many Commonwealth countries for financing vehicles, equipment and machinery. The buyer pays a deposit, then regular instalments that include interest. Legal ownership passes when the final payment (and any option fee) is made.
How it works
- Pay a deposit, often 10% to 20%.
- Take possession and start using the asset.
- Pay fixed monthly instalments over an agreed term.
- Own the asset after the final payment.
Accounting treatment
Because the business has control and the risks and rewards of the asset from the start, it's treated like a purchase financed by a loan:
- Record the asset at its cash price and depreciate it over its [useful life](/glossary/useful-life).
- Record a liability for the amount financed.
- Split each instalment into interest expense and capital repayment.
Example
A company buys a $40,000 truck on HP with a $5,000 deposit and 36 monthly payments of $1,150. Total payments are $46,400, so the finance cost is $6,400, spread over the term as interest.
Hire purchase vs leasing
With HP you end up owning the asset. With most leases you return it, although [lease accounting](/glossary/lease-accounting) under IFRS 16 still puts most leases on the balance sheet.