Hire purchase is considered a special system for sales and purchases. Unlike in normal sales, where one pays all the cash to acquire goods or services, hire purchase allows for payment in form of installments.
The buyer acquires the goods immediately after signing the agreement and paying the down payment. All the installments that the buyer pays are treated as hire until they pay their last installment. It is only after paying the last installment that the title of the goods is transferred to the buyer.
Hire purchase agreements
These are agreements or contracts that govern the hire purchase system. The whole process of hiring the goods to purchase them at the end of the hire purchase is outlined in this agreement. It will specify the products being traded, terms and conditions, rights of the buyers and sellers, and instances under which the agreement can be terminated. As a buyer, it is essential to read and understand the agreement before signing. This helps you make an informed decision.
Characteristics of hire purchase agreements
Some of the main features of hire purchase contracts include
- The buyer makes an initial payment to the owner of the goods. This is usually referred to as the down payment. The down payment is a small fraction of the total cost of the products.
- The buyer acquires the goods after making the down payment. The seller is usually required to deliver the goods to the buyers unless stated otherwise in the agreement.
- One requires paying installments to the owner after acquiring the goods. Installments can be paid daily, weekly, monthly, quarterly, or even yearly, depending on the value of the products.
- The title of the goods remains with the vendor even after the buyer acquires them. Ownership of the products is only transferred after the hirer makes the last installment payment.
- The vendor has the right to repossess the goods should the buyer default on the payments. One ends up losing any payments they had done if the goods are repossessed.
- The total cost of hire purchase is usually higher when compared to cash purchase. This is because the installments in hire purchase include interest. The vendor charges interest at a flat rate.