What are Hire Purchase Agreements?
Hire purchase agreements are used as an arrangement when purchasing expensive goods or services. The purchaser will pay the initial installment or down payment at the beginning, followed by additional payments in the future to pay off the remaining balance of the good, plus interest.
In the U.S., hire purchase agreements are often referred to as installment plans. Such agreements are commonly used to purchase assets that a customer would typically forgo due to their high price. The consumer can “hire” the goods for rent on a periodic payment schedule plus interest until they can become the full owner by paying off their debt.
In some cases, when the good is paid off, the purchaser will still not secure ownership rights. There may be a final, previously agreed-upon fee that must be paid before the title is transferred to the buyer. Other similar financing programs include never-never and rent-to-own.
Benefits of Hire Purchase Agreements
The benefits of using hire purchase agreements stem mainly from the ability to purchase more expensive products than a person or company could normally afford. The payments are spread out over time, making it less of a burden on the purchaser and allowing them to acquire a more expensive asset. A person with a poor credit rating or maxed-out credit can still use a hire purchase agreement because it is not considered an extension of credit.
Similarly, businesses with little or no working capital can take advantage of hire purchase agreements. The ownership of the good is not acquired until all the payments are made, creating minimal risk for the seller as the good can be repossessed at any time if the installments are not made. The agreement is not an extension of credit, making the payment plan an intriguing strategy for consumers to use.
The vendors benefit from hire purchase agreements alongside the buyer. Most of the benefit comes from the increased demand for their product, given that more consumers can afford the expensive goods. Ultimately, hire contracts provide the company with more revenue and a broader customer base. If the company is financing the product themselves, they also reap the benefits of the buyer’s accrued interest, which they will receive in the later installments.
Drawbacks of Hire Purchase Agreements
The hire purchase agreement comes with negatives on both the vendor and buyer sides. The buyer often overextends himself in the attempt to purchase expensive goods outside of their budget and end up burdened by future payments.
Additionally, the interest payments can be quite costly, especially compared to outright purchasing the good at the start. The interest rates also do not need to be explicitly stated, adding to the risk of taking on the hire contract.
On the vendors’ side, hire purchase agreements often lead to complicated organizational and administrative tasks, ultimately creating more costs for the company.
Hire purchase agreements come with conditions to simplify and protect both parties engaged in the contract. Some terms include, but are not limited to installment period and value (including interest), cancellation policy, “hire purchase” total price, description of good or service, etc. Both parties must fully understand and agree to the terms before engaging in the contract.
The hirers are still accountable for taking care of hired assets, continuing to pay the previously specified installments, providing the general location of where the asset will be used, and adhere to all set obligations that vary from contract to contract.
Hire purchase agreements are used to assist buyers in purchasing expensive products or services. It allows an asset’s cost to be spread over time with an initial down payment, followed by periodic installments plus any accrued interest.
It is important to remember that hire purchase agreements are not an extension of credit. Unlike many installment plans, hire contracts do not provide the purchaser with ownership of the good right as the contract is signed; rather, the asset is transferred after all installments are paid and any additional interest.
For the consumer, hire agreements end up being much more expensive than if you were to purchase the good outright at the start. It is a result of the interest charged on the asset for the extended payment term. It also creates increased operational issues and expenses for the company to handle on the vendor’s side.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: