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How does hire purchase work?

As the name implies, hire purchase means paying the price of your purchase in instalments after the acquired asset has changed owners. In most cases, hire purchase is implemented so that the buyer pays a pre-determined instalment monthly to the account of the bank that granted the loan.

Hire purchase is a sensible solution when your company needs to finance an investment with monthly payments instead of a one-off payment.

Examples of assets suitable for hire-purchase finance are plant and equipment, transport equipment or other machinery needed in your company’s operations. The asset may be new or used. You do not need to provide any separate security for the hire-purchase finance, as the purchased asset serves as the security.

Features of hire-purchase finance

The Finnish act on hire purchase governs the use of financing. The financier has the right of reservation of ownership to the financed asset throughout the financing period, but your company can recognise depreciation on the asset in its bookkeeping as usual. The interest on a hire-purchase instalment is a tax-deductible expense, and you can deduct VAT from the entire purchase price right away. The title to the asset will be automatically assigned to your company once the last instalment has been paid.

  • The self-financing share required for hire-purchase finance may include both a down payment and trade-ins.
  • The maximum hire-purchase period is 5 years.
  • You can repay the financing as an annuity or in equal installments.
  • The asset acquired with hire-purchase finance must be delivered acceptably before payment to the vendor.
  • The asset must be insured.
  • The hire-purchase finance may be repaid in full in the middle of the agreement period without your company incurring any additional costs.
  • Acquisition finance has no effect on the investment subsidies granted by the Centres for Economic Development, Transport and the Environment (ELY), but the subsidies can also be utilised when investments are financed with hire purchase. The investment subsidies of the ELY Centres may also be utilised when an acquisition has been made with acquisition finance.

Your benefits

Hire-purchase finance is a useful alternative particularly when an acquisition required by your business would not be otherwise possible.

When the investment costs are spread by means of hire purchase over a longer period of time, the risks related to the acquisition decrease even if the interest rates and other related costs raised the final total expenses of the investment. At the same time, hire purchase makes your company's budgeting and financial planning easier.

For instance, hire purchase enables companies engaged in the manufacturing industry to keep their production equipment modern. This is vital on today’s competitive market especially when a company's business is export-oriented: state-of-the art machinery contributes to the company’s competitiveness and enhances sustainable development of a successful business.

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