What is hire purchase?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Hire purchase is an agreement to buy an item, such as a vehicle, machine or tool, by paying a deposit and then regular instalments that include interest. The business has the use of the item while it pays, and ownership passes to the business once the final payment under the agreement has been made.
Each instalment has two parts: interest charged by the finance company, and an amount that reduces what is still owed under the agreement. In the books, the balance owing is usually tracked in its own liability account, and each payment is split between that account and interest expense, using the figures on the finance company's statement.
Some agreements end with a larger final payment, often called a balloon payment, which keeps the regular instalments lower. The business still owes that lump sum at the end of the agreement, and planning for it starts with an entry in the cash flow forecast months before the due date.
Your accountant can say whether the item is recorded as an asset when the agreement starts and how the agreement is treated after that. Either way, the bookkeeping needs a copy of the agreement, the schedule of instalments and a record of the deposit paid.
In Australia
business.gov.au's glossary describes hire purchase as a purchase contract: a deposit up front, then the item is rented and paid off in instalments that carry interest, with ownership arriving at the final payment. Its entry for a chattel mortgage calls that arrangement similar, with the difference that ownership sits with the business from day one.
Its loan application guide adds that a larger final payment, called a balloon payment, may be chosen to bring the instalments down. Its funding guide lists hire purchase among the ways to fund vehicles, equipment or tools, and among the options for starting or buying a business.
Worked example
| Instalment | Paid (AUD) | Interest (AUD) | Reduces balance (AUD) | Balance owing (AUD) |
|---|---|---|---|---|
| Balance owing after the deposit | 24,000.00 | |||
| Month 1 | 700.00 | 160.00 | 540.00 | 23,460.00 |
| Month 2 | 700.00 | 156.40 | 543.60 | 22,916.40 |
| Month 3 | 700.00 | 152.78 | 547.22 | 22,369.18 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Entering each instalment as an expense in full, which leaves the hire purchase balance in the books at its starting figure.
- Forgetting about a balloon payment until the last few instalments, when there is little time left to plan for it.
- Not matching the balance owing in the books to the finance company's statement each month.
Related terms
Related service
Small business bookkeeping
Your books kept current, every month.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Choose your funding
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.