1. Hire purchase is a type of payment arrangement that allows the buyer to purchase expensive goods and assets without paying the full cost upfront. It is a financing solution suitable for businesses wishing to purchase assets without paying the full value immediately. The business pays an initial deposit, with the remainder of the balance and interest paid over a period of time. On completion, ownership of the asset transfers to the business. It is particularly common in industries where expensive machinery is required, such as construction, manufacturing, plant hire, printing, road freight, transport, engineering and professional services.
2. When you obtain a hire purchase loan from a bank or finance company, you are entering into a “hire purchase”. It works like an extended repayment scheme, where you can use the assets once you have paid a deposit, signed the hire-purchase agreement and paid an instalment in advance, but the bank or finance company owns the assets until you have paid up all amounts owed. All hire-purchase transactions in Singapore are governed by the Hire Purchase Act (HP Act).
3. One important thing to do before taking up a hire purchase loan is to compare interest rates between banks or finance companies. Important questions to ask your bank are like what is the method of interest calculation for the loan, what happens if the loan is redeem my loan early or is there any notice period required.
4. Hire purchase interest is usually computed on a flat rate basis. Under this method of interest computation, interest amount is computed upfront as a lump sum based on the flat rate of interest and added to the loan amount to derive the monthly instalment.
This means that the interest rate is fixed throughout the loan
and therefore the amount of your monthly instalment, remains
the same throughout the duration of the loan.
5. It is important to note that the accounting and tax treatment for hire purchase loans. The capital amount of the loan can be capitalised as the business’ fixed assets in the balance sheet statement, whereas the interest paid on the hire purchase loan are expensed off in the profit and loss account. When it comes to tax treatment, IRAS allows the capital allowance to be claimed on the capital amount paid during the year. The interest paid during the year can be claimed as tax deductible expenses to lower the taxable income.
6. The advantages of choosing to finance assets purchase via hire purchase loan are as follows:
- allows companies to control and deploy assets without significant drain on working capital
- fixed-rate funding makes budgeting easy as the lessee has clear sight of future expenditures
- flexibility of repayment structuring when face with cash flow issues
7. The disadvantages of choosing to finance assets purchase via hire purchase loan are as follows:
- total sum of capital payments is higher than the full payment on the asset purchase as interest payments have to be incurred
- if the business changes its strategy, resulting in the leased asset no longer being useful, there can be early termination charges
8. If you need help to know whether hire purchase is suitable for you business, please come and talk to us. Our team of chartered and certified accountants at PL Biz Consulting Pte Ltd are on hand to support your business and answer your queries – reach out to us today.
