Asset Finance

If you are looking to purchase a vehicle, machinery or equipment but do not have the cash to pay in full, there are several financing options that you can consider, namely Hire Purchase, Finance Lease and Chattel Mortgage. The information below outlines the benefits and differences across these options. Whatever individuals or business needs, Hoju Home Loans can assist you and provide professional solutions that can be customised to suit your requirements.

Buildings

1. Hire Purchase

Under a commercial hire purchase arrangement, lender agrees to purchase the asset or equipment on behalf of the client and then hire it back to the client over the agreed period of time.

The client has the use of the asset during the term of the contract but is not the owner of the asset. The instalment includes the principal amount of the asset and interest. At the end of the contract term when the total price of the asset (less any residual) and the interest charges have been paid in full, the client takes ownership of the asset.

Benefits:

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Flexible contract terms between 24 and 60 months
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Residual value (balloon or final instalment) may be placed on contract
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Fixed interest rate
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Monthly repayment is fixed
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Costs are known in advance
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Deposit (either cash or trade-in) may be used

2. Finance Lease

Finance lease is an agreement between the lessor (lender) and lessee (borrower) whereby the lessee makes periodic lease rental payments to the lessor in exchange for using the lessor’s assets. The lessor legally owns the asset for the whole lease term while the lessee has the right to use the asset and takes on the risks involved in the economic ownership of the asset.

The differences between Hire Purchase and Finance Lease:

Relationship in Agreement

In hire purchase, the parties are owner and hirer, whereas, in finance lease, the parties are called lessor and lessee.

Ownership Transfer

In hire purchase agreement, the ownership is transferred to the hirer after the final instalment is completed. Whereas, in finance lease, the lessee may have the option to own the asset by paying extra money. Therefore, ownership may not be transferred.

Depreciation Benefit

In finance lease, the lessor (lender) has the depreciation benefit, while in hire purchase, the customer will have the benefit for income tax deduction.

Duration

The terms of finance lease is generally longer than hire purchase. Generally, assets like land, buildings and properties are used for finance lease. Whereas, vehicles and equipment are usually financed through hire purchase.

Payment

In a hire purchase, the customer is required to make a down payment and pay off the rest via instalments over a period of time. The instalment includes the principal and interest. In finance lease, the lessee does not need to make any down payment but is only required to make periodic lease rental payments.

3. Chattel Mortgage

A Chattel mortgage is where a finance provider lends the money to purchase asset and the borrower makes regular repayments. It works similarly to a fixed rate home loan. A finance provider uses the borrower’s asset as the security for the loan. The borrower owns the asset but the financier has a mortgage over the security until the loan is fully repaid, including any balloon payment. The borrower can choose to include balloon payment in order to reduce initial repayment amounts or schedule the repayments to pay off the full amount over the term. For the purchase of vehicles, GST is applicable to the purchase price. Therefore, businesses can claim Input Tax Credit if they account for GST on a cash basis.

The differences of Chattel Mortgage from Hire Purchase and Finance Lease:

Title

Under a chattel mortgage, the purchaser takes title in the chattel from the time of purchase. Whereas, in a Hire Purchase and finance lease, the title in the asset remains with the financier and does not transfer until either the option to purchase is exercised by the purchaser, or the final instalment is paid.

GST

For chattel mortgage, GST is applicable to the purchase price of the car or equipment and input tax credit can be claimed up front.

Note

The finance term for most products offered by lenders are usually up to 7 years unless secured with property.

The terms and conditions may also differ depending on the industry you are in.

As different lenders have different products, promotions and policies, it is advisable to consult your mortgage brokers first for optimal recommendations before contacting the banks directly.

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