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Choosing what finance method, you want for your car can be overwhelming especially when you are familiar with the options available. There are two major options of car finance: hire purchase investment and car rental investment. Both options have proven profitable in Nigeria and other parts of the world, but their operations, risk levels, and profit margins dis different.
To be able to make the right choice, it is important to fully understand how each works and which is better as a hirer or an investor looking to make money.
What is Hire Purchase?
Hire purchase is a business where an investor/hire purchase company gives out a car to a driver under a contractual agreement. The driver pays for the car over an agreed period, usually weekly or monthly, until the full cost plus interest is settled.
These payments typically last between one and three or five years and cover the full cost of the car, minus the deposit. You gain legal ownership after the final instalment, but until then, the finance provider holds the title.
Hire Purchase suits people who want long-term use and eventual ownership without needing to pay the entire amount upfront.
What is Car Rental Investment?
Car rental investment is when an investor buys vehicles and rents them out to individuals or organizations for a short period for a fee. It could be on a daily, weekly, or monthly basis. The car remains the investor’s property, and the renter must return it after use. Car rental businesses are popular in cities where short-term mobility is in high demand, such as airports, hotels, and busy urban areas.
One very important thing to note about car rental investment is that it is usually for a short period and renters pay upfront for the period they use the vehicle.
Here, investors usually cover for he maintenance, insurance and repair unlike in hire purchase where maintenance and repair may be covered by hirer depending on the signed contract
Hire Purchase vs Car Rental Investment
1. Profitability
In hire purchase, investors usually earn more because repayment includes profit on top of the car’s market value. For example, a ₦7 million car could generate ₦9 million after full repayment.
On the other hand, car rental profit depends on demand. Cars generate income daily, but when demand is low, earnings may drop. For this reason, car rental companies or organisations may need contact with many hotels, airlines, self-driving companies, travel agencies and so on. However, in high-demand areas, returns can be massive.
2. Risk Level
There are so many risk associated with hire purchase, one of which is the driver’s defaults on payment or misuse of the car. However, contracts and legal backing reduce this risk.
One of the risk of car rental is that renters may damage the car, refuse to return it on time, or cause accidents. Since vehicles are used by multiple drivers, wear and tear is faster.
3. Ownership and Maintenance
The ownership for hire purchase can only be transferred after full payment has been made. The driver takes responsibility for maintenance during the contract period.
In car rental, ownership remains with the investor. He only gets paid once the car is rented. The investor bears full responsibility for regular servicing, insurance, and unexpected repairs.
4. Cash Flow
There is better cash flow in hire purchase in that payments come weekly or monthly, creating steady income. However, once the car is fully paid for, the investor needs another vehicle to reinvest.
Cash flow in rental service is faster since renters pay daily or weekly. Multiple cars can generate income simultaneously.
5. Depreciation
Hire purchase allows you to claim depreciation as a hirer because you work towards full ownership. You treat the car as your asset, which means you can write down its value over time for tax purposes (if you’re using the car for business). This setup gives you more control over how and when you report the cost.
With car rental, it works differently. The finance provider owns the car and records the depreciation, not you. You only claim the lease payments as an expense, so you won’t deal with depreciation directly.
5. Suitability
Hire purchase is better for those who want predictable income and less stress managing drivers. On the other hand, car rental is better for investors with access to high-demand markets (e.g., airports, tourist cities).
Which is Better?
Both options offer very interesting and profitable returns to both investor or hirer. If you want to choose which will be better for you, here are factors you should consider:
- What kind of ownership do you want?
- What do you want to use the car for- Is it for a short time or long term?
- How long will you be able to pay?
- How well are you willing to risk our investment?
However, if you want to own the car in the end, hire purchase makes more sense. You spread the cost across fixed monthly payments, then take full ownership once the agreement ends. But, if you want to just use the car for a one time or short period of time, car rental suits you. You will pay for the time you use the car, not the full value. This suits you if you prefer to switch cars every few years or want to avoid long-term commitments.
You can also read Where can I get a hire purchase car in Edo State?