Hire purchase vs finance lease vs contract hire
Three common ways for a business to get the vehicles, plant and equipment it needs. The right one depends on whether you want to own the asset, how much cash you want to keep, and how long you'll use it.
The short answer
Hire purchase is for businesses that want to own the asset at the end. A finance lease keeps more cash in the business at the start because VAT is spread across the rentals, and you share in the sale value at the end without taking ownership. Contract hire is a fixed monthly rental with an agreed mileage, and you hand the asset back, so you don’t carry the risk of what it’s worth later.
Side by side
| Question | Hire purchase | Finance lease | Contract hire |
|---|---|---|---|
| Who owns it? | You, once the final payment is made. | The lender, throughout. | The leasing company, throughout. You hand it back. |
| What you pay upfront | A deposit plus VAT on the full price, unless the VAT is deferred. | Usually one or more advance rentals, plus VAT on them. | Usually an initial rental, often a multiple of the monthly rental. |
| How VAT is charged | On the full price at the start. VAT-registered businesses can usually reclaim it. | On each rental as you go. | On each rental as you go. |
| At the end of the term | The asset is yours. | Keep using it on a low secondary rental, or it is sold and you usually receive most of the proceeds (often around 95%). | Hand it back. Charges may apply for excess mileage or damage beyond fair wear and tear. |
| Who carries the value risk? | You. If the asset is worth more or less than expected, that is yours. | Mostly you, through the share of the sale proceeds. | The leasing company, which sets the rental around the expected resale value. |
| Maintenance | Your responsibility. | Your responsibility. | Can be included in the rental as a maintenance package. |
| Mileage or usage limits | None from the lender. | Normally none, though heavy use affects what it sells for. | Yes, an agreed annual mileage. |
| Tax treatment (general) | Usually treated as owned for capital allowances. | Rentals are usually a business expense. | Rentals are usually a business expense. |
Which tends to suit which situation?
Hire purchase may suit you if…
- You want to own the asset outright at the end.
- You’ll keep it for most of its working life.
- You’re VAT-registered and can reclaim the VAT, or can defer it.
- You use it heavily and don’t want mileage limits.
A finance lease may suit you if…
- You want to keep cash in the business at the start.
- You’d rather pay VAT on each rental than upfront.
- You don’t need to own it, but want to benefit from its value at the end.
- You plan to replace the asset at the end of the term.
Contract hire may suit you if…
- You want a fixed monthly cost, possibly including maintenance.
- You change vehicles every few years.
- Your mileage is predictable.
- You don’t want the risk of what the vehicle is worth later.
Two things that often get missed
Compare the total, not just the monthly payment. A balloon payment or final rental can make the monthly figure look low while leaving a large amount to pay at the end. Ask for the total amount payable and any fees, including any option-to-purchase fee on hire purchase.
VAT timing affects your cash flow. On hire purchase, VAT on the whole price is normally due on day one, even if you reclaim it on your next VAT return. Deferring it for up to three months can bridge that gap. See VAT on asset finance and VAT deferral for how that works.
Buying a used van or truck? Used commercial vehicle finance covers what changes when the vehicle isn’t new.
Frequently asked questions
What is the main difference between hire purchase and a finance lease?
Ownership and VAT. With hire purchase you own the asset once it is paid off, and VAT on the full price is normally paid upfront. With a finance lease the lender owns the asset, VAT is added to each rental, and at the end you either keep using it on a small secondary rental or it is sold and you usually receive most of the proceeds.
Which is cheaper, hire purchase or a finance lease?
Neither is always cheaper. The total cost depends on the rate, the term, any balloon or final rental, and how you treat VAT and tax. A finance lease often needs less cash at the start; hire purchase leaves you owning an asset at the end. Compare the total amount payable as well as the monthly figure.
Is contract hire the same as leasing?
Contract hire is a type of leasing, sometimes called an operating lease. The key difference from a finance lease is that you hand the asset back at the end, and the leasing company, not you, takes the risk on what it is then worth. It is most common for cars and vans on fixed-mileage agreements.
Can I put a balloon payment on hire purchase?
Yes, in many cases. A balloon is a larger final payment set against what the asset is expected to be worth at the end. It reduces the monthly payments, but you will need to pay or refinance the balloon when it falls due.
Can I end an agreement early?
Usually, yes. Hire purchase and finance lease agreements can generally be settled early for a settlement figure from the lender. Contract hire agreements often have early termination charges. Ask for the early settlement terms before you sign.
Which one does DCF recommend?
It depends on how long you will keep the asset, how much cash you want to keep in the business, how you handle VAT, and whether you want to own it at the end. We mainly arrange hire purchase and finance leases for limited companies, and will explain which fits your situation. For tax treatment, your accountant should confirm.
Related guides
Not sure which fits?
Tell us what you're buying and how you'll use it, and we'll set out the hire purchase and finance lease options side by side.
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