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What is a Hire Purchase Agreement?

If you are a small business, you can manage your finances by choosing to obtain equipment under a hire purchase agreement. This arrangement differs from a conventional loan in that there is, strictly speaking, no actual lending or borrowing of funds. In this article, we explain what a hire purchase agreement is and how it works. 

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What is a Hire Purchase Agreement?

A hire purchase agreement can substitute a business loan where the party hiring the equipment pays the financier’s rent. The financier is typically the person, company or government that provides money for projects or businesses.

The financier will continue to own the goods until the hirer makes the final payment.

Typically, hire purchase agreements have fixed regular payments. The type of information you may see in a hire purchase contract includes:

  • a description of the goods;
  • the rate of hire and interest charges;
  • the total price to purchase the goods;
  • details of the deposit; and
  • information on both parties’ rights.

How Does It Work?

Sometimes a hire agreement does not occur exclusively between the person hiring the goods and the owner of the goods or services (financier). Often, it involves a third party. A typical example of third-party involvement is when you hire cars or other vehicles. In most vehicle hire agreements, a finance company will purchase the car on your behalf and then give you possession in return for regular payments (including interest). When the agreement terminates or ends, and you pay the total price of the vehicle plus the interest charges, the hirer can take ownership.

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What is a Labour Hire Agreement?

There can also be hire agreements for labour. A labour-hire agency, for example, will rely on a written agreement to provide workers to a company. The type of information that you may see in a labour-hire agreement includes:

  • the nature of the services;
  • how workers will be supplied and in what number;
  • insurance details, if any;
  • applicable fees and methods of payment;
  • occupational health and safety measures;
  • details of intellectual property rights;
  • avenues for terminating the agreement; and
  • details of potential security measures in the event of loss of finance.

Should a Hire Agreement Be in Writing?

You should ensure the terms of your hire agreement are in writing. This will clarify essential details and allow you to reference a document when you discuss the arrangement. If the party you are contracting with is a professional hire firm, they will usually only allow you to hire on their terms and conditions. Therefore, you must read these carefully to understand your obligations. 

Under a hire purchase agreement, the legal owner of the goods or services is the financier until the hirer makes the final payment. Therefore, you will want to be sure that the contract outlines precisely when you become the owner of the goods and whether other conditions are applicable. 

Are There Any Risks?

Naturally, entering any arrangement comes with some risks! However, if you enter without understanding the terms of your hire, you needlessly expose yourself to risk. Therefore, speaking with a legal professional and reviewing your hire purchase agreement is sensible to understand your rights and obligations.  

Some other risks include that you may be liable for any damage to goods belonging to another business. So, you should understand your responsibilities if you fall behind on your repayments (such as whether the financier can repossess the equipment after an agreed time frame).

Are You Protected?

Just as Australian Consumer Law protects you when you make purchases and buy goods, there are also consumer protections for when you hire goods or services. These are known as the Consumer Guarantees, which protect consumers and ensure that businesses comply with these standards when employing hire agreements to provide goods or services.

A well-drafted or reviewed contract is also a great way to protect your interests and ensure you are in the best position in the future.

Key Takeaways

In short, a hire purchase agreement is a form of the asset purchase agreement, where you gradually repay the price for an item until you can own it in full. Therefore, it is essential to clearly understand how your arrangement works in the form of a contract so that you can understand your obligations and rights. 

If you require assistance drafting your hire purchase agreement or have any questions about your rights and obligations, our experienced leasing and loans lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is the difference between a lease and a hire purchase agreement? 

Under a lease, you never own the goods you are paying for. A hire purchase agreement is different. After you make all of the repayments and the agreement is complete, the goods are entirely yours. 

Who owns the asset under a hire purchase agreement?

At the beginning of the arrangement, the asset belongs to the financier. However, once you make all the repayments, you will be the legal owner of the goods.

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Stephanie Long

Stephanie Long

Senior Lawyer | View profile

Stephanie is a Senior Lawyer in LegalVision’s Corporate and Commercial team. She specialises in commercial contracts and business structuring to assist clients in achieving their ambitions with their startups and SMEs.

Qualifications: Bachelor of Laws, Bachelor of Social Sciences, Macquarie University.

Read all articles by Stephanie

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