Hire purchase is an arrangement. It allows for the purchase of an expensive consumer good on credit. The buyer is then required to make a down payment on their purchase, with the balance of the amount due paid off with installment payments, plus interest. It is similar to an installment plan with one exception: the ownership of the item purchased does not fully transfer to the buyer until all payments are made.
Hire purchase agreements are available for B2B and B2C transactions.
List of the Advantages of Hire Purchase
1. Items can be repossessed if payments are not made.
A hire purchase arrangement is beneficial because it reduces the risk of the provider for the consumer goods involved. Because the ownership of the item does not officially transfer until all payments are made, this plan offers protection to the vendor for an unsecured item because it can be repossessed. If the buyer is unable to make payments, losses can be recouped by acquiring the item purchased and selling it again.
2. It allows for ownership of newer, better equipment.
When using a hire purchase agreement, it becomes possible to afford better equipment or consumer goods than if the transaction was to buy the item outright. Although it requires payments from the buyer, which often can last for years, it gives them the ability to use the item right away. This is despite the lack of technical ownership. Buyers are still responsible for taxes and other costs associated with ownership as well, further reducing the risk to the vendor.
3. It spreads out the costs over time.
When purchasing large consumer goods, it is difficult for some businesses or households to come up with the necessary cash to purchase items outright. Hire purchase allows for the payments to be spread out over time to make the purchase affordable. Buyers can take confidence in the fact that they have fixed monthly payments which are guaranteed not to increase. Interest rates are locked in with a hire purchase at the time of the transaction.
4. There are usually no taxes charged on a hire purchase agreement.
If your country has a value-added tax or something similar that is assigned to transactions, then leasing an item will result in a tax charge being added onto the buyer’s monthly payments. This issue goes away when a hire purchase agreement is in force. There will still be a sales tax charge or other upfront taxes as part of the transaction. The advantage here is that vendors usually permit buyers to roll the cost of taxation into the overall agreement, reducing long-term add-on costs.
5. Buyers can shop around for better deals.
Buyers can choose which vendor they want to work with when there is a specific purchase that needs to be made. That allows them to find the best possible price on the items they require. Financing for the hire purchase may be offered by the vendor. Buyers can also secure their own financing arrangement with the hire purchase process, giving them even more flexibility in where they shop. That makes it easier to avoid borrowing or using corporate or personal savings to secure items that are required.
6. There are ways to reduce the mandatory monthly payment.
If a monthly payment seems too high, even with a down payment being provided, there are still options available to further lower the cost of the transaction. A balloon payment is the most popular method to reduce monthly payments. It will require the buyer to make a large one-time payment at the end of the hire purchase agreement to finalize ownership transfer. If that payment is not made, then ownership does not transfer and the right to repossess still exists.
7. Down payments are sometimes optional with this type of transaction.
For corporations or households with an excellent credit profile, a down payment may not be necessary as part of the hire purchase agreement. That means it is possible to take home the items needed without paying anything to secure the right to do so. The buyer would still be required to make the structured monthly payments to avoid repossession. Monthly payments with a zero-down option tend to be much higher as well, so it is usually better to put down some type of down payment if possible.
8. It can be paid off early in most cases.
Most hire purchase agreements allow the buyer to pay off the contract early if they have the money to do so. Some agreements may require monthly payments to continue for 12-24 months to ensure the transaction is profitable for the vendor. This option is a good way to reduce the long-term cost of the hire purchase transaction when it can be accomplished.
9. There are few restrictions in place for hire purchase agreements.
Using the example of purchasing a car here, vendors will often put mileage stipulations or conditions on the agreement that must be met. If these conditions are not met, then additional charges become the responsibility of the buyer at the end of the lease. A hire purchase contract removes these restrictions, allowing buyers to use the vehicle as their own until it becomes their own when they make the last payment on it.
List of the Disadvantages of Hire Purchase
1. Items can be repossessed if payments are not made.
There are several laws in place which prevent vendors from being able to repossess certain items, even if the buyer falls behind on payments or refuses to make them. In Washington State, for example, it is not permitted for creditors to move another car to reach your car if you qualify for repossession. Creditors are not permitted to have a vehicle towed from your garage. They are even forbidden from repossession if you resist them taking the vehicle.
2. Monthly payments are often reflective of credit ratings.
To get the best hire purchase arrangement, buyers must have a strong credit profile. If they do not have a strong profile, vendors may decide not to work with the business or household attempting to make a purchase. Those with subpar credit scores will find that if they are approved, the interest rates will be higher than if they had good credit. Over the lifetime of a hire purchase agreement, a higher interest rate can result in thousands of extra dollars being spent on the item.
3. It forces the transaction to cost more than it would otherwise.
Even with a solid down payment on the transaction, the interest rates on a hire purchase agreement will cause the final cost of the item to be higher than if it were purchased outright. Over the life of a 5-year agreement, for example, the final cost of a $21,000 vehicle might exceed $30,000 when all the payments are added together. Some buyers may qualify for low- or no-cost financing to reduce this issue, though for the average agreement, this disadvantage stands true.
4. Not paying the required payments reduces a credit score.
A hire purchase agreement is usually reported to the major credit reporting bureaus, even if it is a B2B transaction. If the buyer fails to make a single payment, this fact will be reported. The impact of the missed payment can then affect the buyer’s ability to make another hire purchase in the future. If a repossession occurs, this issue could stay on the credit report for the business or individual for up to 7-10 years in some jurisdictions. For that reason, it is imperative for buyers to be proactive about their hire purchase agreements if they are unable to make a payment on time.
5. There are fewer discounts usually available.
Compared to a leasing agreement or an outright purchase, there are fewer discounts usually offered to buyers who pursue a hire purchase agreement. That is because there are more risks associated with that type of transaction. With a lease, consumers are paying for the depreciation of the item. With an outright purchase, there is zero risk to the vendor, allowing for the possibility of more discounts.
The advantages and disadvantages of hire purchase contracts create a win/win for all parties involved. Buyers get the chance to use, and eventually own, equipment they might not be able to purchase outright immediately. Vendors benefit by being able to sell more items while retaining technical ownership over them to reduce their risk. All elements of a transaction should be closely examined before signing anything to ensure the best possible results can be achieved.