What is hire purchase (HP)?
HP is a type of finance where a borrower has use of a new asset while paying for it through regular instalments. The borrower makes an upfront payment which includes a deposit and the VAT due on the asset purchase. When the final instalment is paid, the borrower may return the asset and end the agreement or take ownership of the asset. All HP agreements are therefore secured and if a borrower defaults, the lender can repossess the asset.
HP is used solely for the purchase of an asset - this is different to general business loans, which can be used for multiple purposes such as working capital or business expansion.
Who are you making your HP product available to?
RateSetter is now making HP agreements available to businesses that want to purchase business critical assets in order to invest and grow, and we plan to launch HP products for individuals later this year.
How are you delivering Business HP agreements?
We are partnering with Corporate Asset Solutions (CAS), who are experts in the leasing and asset finance market. CAS provide the distribution channel for RateSetter’s business HP agreements and support the process. RateSetter also considers direct hire purchase agreements.
RateSetter business finance experts analyse all applications and make all approval decisions. All HP borrowers pay into the Provision Fund based on RateSetter’s assessment of creditworthiness at the point of approval and we take full security over the underlying assets.
What kind of businesses will be able to apply for an HP arrangement?
The lending policy is consistent with our existing Business Finance lending policy, for example all borrowers must have a trading history of at least 3 years. Our business finance experts carry out independent analysis and credit checks on each application.
What are the terms of Business HP agreements?
The agreements will have fixed monthly instalments and a term of between 12 and 60 months. A deposit and the VAT due on the asset purchase are paid upfront by the borrower. We allow early repayments without penalty.
Who owns the assets that Business HP agreements are secured on?
The legal ownership of the underlying asset in each HP agreement is held by RateSetter on behalf of lenders until the borrower makes their final payment. Capital and interest are returned to RateSetter’s lenders each month in the usual manner as the borrowers makes their regular payments.
The hirer always takes full responsibility for the insurance, maintenance and upkeep of the asset for the whole duration of the HP agreement. Until the finance has been repaid in full and the option to purchase fee has been paid, RateSetter retains legal ownership of the asset on behalf of lenders.
Does this change the risk of investing with RateSetter?
This does not materially change the risk of investing with RateSetter. All HP agreements pay into the Provision Fund based on RateSetter’s assessment of creditworthiness at the point of approval and we take full security over the underlying assets.
The Provision Fund has the effect of spreading the exposure of every lender across all our loans. This means that the risk taken on by each individual RateSetter lender is effectively diversified across the hundreds of thousands of RateSetter borrowers, which is one of the strengths of the Provision Fund model.
The expected default rate on HP agreements is in line with that of the rest of our loan book.
We believe that HP products will broaden our addressable market and enhance RateSetter’s offering to borrowers, while providing a new channel to deliver steady returns to lenders. We have reflected the above information in our lending criteria, which can be found here.