Explaining the difference between hire purchase and a finance lease

Many businesses in the UK and Ireland use asset finance to spread the cost of vehicles, machinery and equipment without putting pressure on cash flow.

But there are several different types of asset finance, and it’s easy to mix them up.

For example, many business owners aren’t sure about the difference between hire purchase and finance leasing, two of the most common options.

Both of these commercial finance solutions can help you get the assets you need. But they work in different ways and have different outcomes.

In this blog, we provide a simple comparison of hire purchase and finance lease options, including how they work, advantages and when to use them.

By the end, you’ll have the clarity to decide which type of finance best suits your business.

What is hire purchase?

Hire purchase explained

Entering a hire purchase agreement is one of the most straightforward ways to finance new assets.

It works like an instalment plan. Instead of paying for the asset upfront in one big lump sum, you spread the cost across fixed monthly payments.

This lets you access the assets you need immediately while preserving working capital for other areas of your business.

The key distinction from finance leasing is that at the end of your hire purchase contract you become the owner of the financed asset.

How does hire purchase work?

A hire purchase contact has three main components: a deposit, a schedule of fixed repayments and a final transfer of ownership at the end of the agreement.

Deposit

You pay the deposit at the start of your agreement, typically 10-20% of the asset’s value.

This upfront contribution reduces the overall amount being financed and reassures the lender of your commitment.

Repayments

Repayments are set out in advance and remain fixed for the duration of your contract.

They include both capital and interest, spreading the cost of assets evenly over the life of your hire purchase agreement.

This predictability makes it easier to budget and lets you boost cash flow.

Ownership

At the end of your agreed term, you pay a small option-to-purchase fee.

After that, legal ownership of the asset passes to you.

From this point onwards, you’re free to use, sell or trade the asset as you see fit.

What is hire purchase used for?

Hire purchase is a good option for financing business assets that you want to own long term and that retain value over time.

Businesses often use hire purchase to finance:

• Long-service vehicles: Lorries, vans, heavy goods vehicle (HGV) fleets, specialist trailers
• Agricultural machinery: Tractors, harvesters, balers, sprayers
• Construction equipment: Excavators, loaders, bulldozers, dump trucks
• Plant hire assets: Cranes, diggers, piling rigs, specialist plant
• Medical equipment: MRI scanners, X-ray machines, ultrasound machines, dental chairs
• Renewable energy systems: Solar panels, biomass boilers, wind turbines, battery storage units
• Retail and hospitality fit-outs: Commercial ovens, refrigeration units, counters, shop fittings

Pros and cons of hire purchase

The advantages of hire purchase include:

• You own the asset once the agreement ends
• Fixed repayments make budgeting straightforward
• The asset appears on your balance sheet right away
• Assets may hold resale value after the term
• Access to equipment without heavy upfront costs
• Interest on repayments is often tax-deductible
• You can align repayment terms with cash cycles

But the drawbacks of hire purchase consist of:

• Lenders usually require larger deposits upfront
• You cover maintenance, servicing and insurance
• There’s risk if the asset depreciates too quickly
• There’s limited flexibility for frequent upgrades

Hire purchase tax treatment

Choosing hire purchase is a great way to leverage the tax benefits of asset finance.

Since your business will eventually own the asset, your asset finance contract is treated like an outright purchase for tax purposes.

That means you can usually claim capital allowances such as the Annual Investment Allowance (AIA). So you can offset the cost of the asset against your taxable profits.

For many companies in the UK and Ireland, this means substantial tax savings in the year of acquisition.

Interest charged on repayments is often deductible as a business expense as well, making hire purchase even more cost effective.

What is a finance lease?

Finance leasing explained

A finance lease is similar to hire purchase in many ways. But unlike hire purchase, you never become the owner of the financed asset.

Instead, the lender buys the asset and leases it to you for fixed monthly payments.

This provides long-term use of assets that you don’t want to own at much lower cost than outright purchase.

How does finance leasing work?

Your finance lease starts with an advanced rental (typically 1-3 months of payments) followed by fixed monthly instalments.

These instalments cover both the value of the asset and interest charged by the finance provider. They’re agreed upfront and remain the same throughout your contract, making them predictable.

In contrast to hire purchase, there’s no option-to-purchase fee at the end of your agreement term.

Instead, you have three potential options:

• Return the asset
• Renew your lease
• Arrange a sale on behalf of the lender and keep part of the proceeds

What is finance leasing used for?

Finance leasing is a good choice for assets that depreciate quickly or often need to be replaced with newer models.

This flexibility is often more valuable than ownership when financing assets like:

• High-turnover vehicles: Company cars, delivery vans, taxis, minibuses
• IT and telecoms: Laptops, tablets, mobile phones, networking hardware
• Retail and hospitality equipment: Electronic Point of Sale (ePOS) systems, digital signage, vending machines, shop furniture
• Medical technology: Patient monitors, infusion pumps, endoscopy systems, portable ultrasound units
• Construction site equipment: Scaffolding, access platforms, temporary cabins, generators
• Energy-efficient technology: LED lighting, smart thermostats, HVAC systems, building management controls
• Office equipment: Photocopiers, printers, scanners, video conferencing systems

Pros and cons of finance leasing

The advantages of a finance lease include:

• No large upfront deposit is required to access the asset
• Predictable fixed repayments support better budgeting
• You can choose from multiple end-of-contract options
• Leasing preserves capital that can be invested elsewhere
• Lease payments are often fully deductible as expenses
• Suitable for assets that lose value quickly or need regular updates
• Access to cutting-edge assets without long-term commitment

But the drawbacks of a finance lease consist of:

• Your business never owns the asset outright
• You’re responsible for maintenance and insurance
• Extending your lease can increase costs beyond purchase
• Your business doesn’t benefit from capital allowances

Finance lease tax treatment

Similar to hire purchase, finance lease rental repayments are normally treated as deductible business expenses that reduce your taxable profits.

But because your business never takes ownership of the asset, you can’t usually claim capital allowances on it.

When you contact Kane Financial Services for tailored asset finance opportunities, we keep these tax considerations in mind. With our help, you can find affordable contracts that provide the greatest long-term value for your business.

Hire purchase vs finance lease: Which is better?

When is hire purchase the best option?

Hire purchase is usually the right choice for funding assets with a long service life that you intend to keep for many years.

It spreads the cost of your purchase over time, reducing the impact on business cash flow.

And because the finance asset is treated as a purchase, you can use hire purchase to reduce your tax bill.

When is finance leasing the best option?

Choose a finance lease when you need to access high-value assets that you don’t actually want to own.

That could include assets that lose value quickly or ones that you often need to replace, such as fleet cars or IT systems.

Finance leasing is often more affordable than hire purchase, allowing your money to work harder.

Match with a specialist asset finance lender today

Regardless of which asset finance option is right for you, the process starts with finding a lender.

You could visit a generic high street lender to get an off-the-shelf contract. But you can enjoy much more competitive rates and terms with a specialist lender who understands your industry.

As an independent asset finance broker with over 35 years’ experience, Kane Financial Services matches businesses throughout the UK and Ireland with lenders who best suit their needs.

Apply for asset finance online today to explore your options and get a free no-obligation quote.