Hire purchase

3 key takeaways

• Hire purchase allows consumers to own goods after making an initial deposit and subsequent installment payments.
• Ownership of the goods is transferred to the buyer only after the final payment is made.
• It provides an accessible way for consumers to purchase expensive items without paying the full price upfront.

What is hire purchase?

Hire purchase is a financial arrangement that enables consumers to buy goods by paying an initial deposit and agreeing to make regular installment payments over a specified period. Unlike traditional credit, where ownership transfers at the point of sale, hire purchase agreements stipulate that the ownership of the goods remains with the seller until all payments are completed.

This type of agreement is commonly used for purchasing high-value items such as cars, appliances, and furniture. It allows consumers to spread the cost over time, making it easier to manage their finances and afford expensive purchases without a large upfront payment.

How hire purchase works

When a consumer enters into a hire purchase agreement, they typically make an initial deposit, which is a percentage of the total cost of the goods. The remaining balance is then paid off in regular installments over a set period. These installments usually include interest, which means the total amount paid by the end of the agreement is higher than the initial cash price of the goods.

During the installment period, the buyer has the right to use the goods, but the ownership remains with the seller or finance company. Once the final payment is made, ownership transfers to the buyer, and they become the legal owner of the goods.

Benefits of hire purchase

Hire purchase offers several advantages for consumers:

• Affordability: By spreading the cost over time, consumers can manage their cash flow more effectively and afford items that might be out of reach with a lump-sum payment.
• Immediate use: Consumers can take possession of the goods and start using them immediately after the agreement is signed and the initial deposit is paid.
• Fixed payments: Regular, fixed installment payments make budgeting easier and provide financial predictability.

Drawbacks of hire purchase

Despite its benefits, hire purchase also has some drawbacks:

• Higher overall cost: The total amount paid over the term of the agreement is usually higher than the cash price due to interest charges.
• Ownership delay: Ownership of the goods is not transferred until the final payment is made, meaning the buyer does not own the goods until the end of the agreement.
• Repossession risk: If the buyer fails to make the required payments, the seller or finance company can repossess the goods.

Common uses of hire purchase

Hire purchase is widely used in various sectors, particularly for acquiring high-value items:

• Automobiles: Many people buy cars through hire purchase agreements, allowing them to drive a vehicle while paying for it over time.
• Appliances and electronics: Consumers often use hire purchase to acquire expensive household items such as refrigerators, washing machines, and televisions.
• Furniture: Hire purchase agreements are also popular for purchasing furniture, enabling consumers to furnish their homes without a large initial outlay.

Related topics

• Installment plans
• Consumer credit
• Leasing
• Personal loans

Explore these related topics to gain a deeper understanding of different financing options and how they can help manage your financial needs.