Hire purchase vs leasing: which is right for your business assets?
Hire purchase is buying an asset in instalments: you claim capital allowances and own it after the last payment, but VAT on the…
Asset finance
Hire purchase vs bank loan: which is better for buying business equipment?
Hire purchase vs a bank loan for vehicles, plant and equipment: cost, security, VAT and tax compared, with a worked £60,000 example and who each suits.
In this guide
When a business buys a van, a machine or equipment, the two most common ways to spread the cost are hire purchase (HP) and a business loan. Both let you pay over time and own the asset in the end, but they work differently on security, VAT, ownership and flexibility. This guide compares them side by side. We are a broker: we search the market and compare both routes for you.
The short answer
Choose hire purchase when you are buying an identifiable asset that holds some value, such as vehicles, plant or machinery, and want the asset itself to be the security. Choose a business loan when the purchase is a mix of things lenders will not finance as assets (fit-out, software, installation, stock), or when you want to own the asset outright from day one.
Side by side
| Hire purchase | Business loan | |
|---|---|---|
| Security | The asset itself | Often unsecured with a personal guarantee, or secured on property |
| Ownership | The lender owns it until the final payment | You own it from purchase |
| Deposit | Usually required, often with the VAT | No deposit; you can borrow the full price |
| VAT | VAT on the price is normally paid upfront | Paid to the supplier out of the loan |
| Tax | Capital allowances can usually be claimed as if you owned the asset; interest is a cost | Capital allowances on the asset; interest is a cost |
| Effect on other borrowing | Leaves bank and property security free | Uses general borrowing capacity |
| What it can fund | Identifiable assets lenders can value | Anything, including soft costs |
| Payment options | Fixed instalments; optional balloon or seasonal profile | Fixed instalments, sometimes with a capital holiday |
Worked example: a £60,000 machine
An illustration only, not a quote, using rates inside the ranges lenders on our panel publish (see the rate index). Figures exclude VAT and fees.
| Hire purchase | Unsecured loan | |
|---|---|---|
| Deposit | £6,000 (10%) | None |
| Amount financed | £54,000 | £60,000 |
| Term and rate | 48 months at 9% a year | 48 months at 11% a year |
| Monthly payment | £1,343.79 | £1,550.73 |
| Total interest | £10,502 | £14,435 |
| Total paid including deposit | £70,502 | £74,435 |
Here HP costs less because the asset secures it, but needs £6,000 upfront. Your own figures depend on the asset, your business and the lender. Our asset finance calculator and business loan calculator let you try your numbers.
When hire purchase suits
- Vehicles, plant, machinery and equipment with a resale value.
- You want to keep your overdraft, property and other security free.
- A younger business, because the asset carries much of the lender's risk.
- You want to claim capital allowances, which are generally available on HP as if you had bought the asset.
When a business loan suits
- The cost includes fit-out, installation, software or other items lenders will not take as security.
- You are buying from a private seller or abroad, where some asset lenders are cautious.
- You want to own the asset outright immediately, for example to use it as security elsewhere.
- You have cash flow to fund a full-price purchase and no deposit.
Leasing: the third option
If you do not need to own the asset, a lease may cost less each month, because you pay for its use rather than its full value. See our hire purchase vs leasing guide.
What lenders check on either
- Trading history, accounts and bank statements.
- Credit records of the business and directors.
- For HP: the asset, its age, supplier and expected value.
- For a loan: affordability across all your borrowing, and any security offered.
How we can help
This guide is general information, not financial advice. Lenders set their own criteria, rates and terms, and all finance is subject to status.
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FAQs
Common questions
Is hire purchase cheaper than a bank loan?
Often, for assets that hold their value, because the asset secures the finance. But HP usually needs a deposit and the VAT upfront, and a secured bank loan can be cheaper for larger, well-established businesses. Compare the total cost of each offer.
Can I claim capital allowances on hire purchase?
Generally yes: for tax, an asset on hire purchase is usually treated as if you bought it, so capital allowances such as the Annual Investment Allowance can usually be claimed, and the interest is a business cost. Check the details with your accountant.
Does hire purchase show on my credit file?
Yes. HP is a credit agreement and appears on the business's credit record, and on yours if you are a sole trader or partner. Paying on time helps your record.
Can I pay off hire purchase early?
Usually, yes, by asking the lender for a settlement figure. Some agreements include a charge for early settlement or interest to a set date, so check the terms.
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