How is hire purchase different from traditional financing? Which is the better option when looking to acquire assets for a home or business?
When in the market for a high-value asset, one will be keen to find out financing options available to them. While there are buyers who choose to buy assets in cash, it is not always possible, especially when it comes to high-value items. Some of these items include cars, homes, furniture, electronics, kitchen appliances, and other household items. Hire purchase is one of the finance options available in today’s market.
How Traditional Financing Works
Financing involves looking for a short- or long-term loan from traditional lenders to purchase items that you require. In some cases, when one chooses financing, the assets they acquire act as collateral for the loan. However, this is not always the case as some lenders can provide unsecured loans.
How Hire Purchase Works
Hire purchase is usually a purchase contract between a hire purchase dealer and a buyer looking to acquire assets. In this purchase contract, the buyer pays a deposit as low as 10% of the total cost of the items they intend to purchase. The hire purchase company delivers the items and they have a right to use them. However, one doesn’t automatically become the owner of the assets they are hiring. The dealer remains with the title and only transfers it to the buyer when they pay all the installments.
How hire purchase is different from traditional financing
Hire purchase is a form of finance when looking to acquire assets, but it varies from traditional financing in the following ways.
· Ownership of the assets
In traditional financing, one gets cash from a loan and uses it to purchase assets. This means that they pay in cash and ownership is transferred to them from the seller. In some cases, the assets act as collateral for the loan and the lender may possess them when you do not repay the loan.
On the other hand, the hire purchase dealer only transfers ownership of the assets when one pays all the installments. They remain the owners of the asset through the contract and can repossess the assets when one fails to honor the contract and make payments.
· Interest rates
In the case of traditional financing, one acquires a loan from a lender. The lending rates are subject to changes depending on the Central bank’s base rates. This means that the interest rates can increase or decrease at some point. Hire purchase on the other hand comes with a fixed interest rate. This means that the installments do not change with time, and one knows the total value of the asset they are purchasing even before signing the contract.