Hire purchase has become one of the best financing options available to consumers in modern times. In Kenya, hire purchase is also known as lipa mdogo mdogo or lipa pole pole. Before signing a hire purchase agreement, it is essential that a customer understands the pros and cons of hire purchase. Investing some effort and time will ensure that you are making the right choice.
What is hire purchase
A hire purchase contract is an agreement between a seller and a buyer. When purchasing expensive assets such as electronics or furniture, you might be unable to pay the total cash upfront. With hire purchase, the buyer only provides a fraction of the total cost. The balance plus interest is paid in the form of daily, weekly, or monthly payments known as installments.
Pros of hire purchase
There are plenty of reasons to consider hire purchase when looking for a high-value asset. Here are some of the benefits.
1. Own assets at the end of the agreement
Other options when hiring assets such as a lease will see one return the assets at the end of the agreement. With hire purchase, when you pay the last installment, you own the assets.
2. Spread the cost
The best part about hire purchase agreements is that you will spread the cost of the asset. You do not pay for the asset upfront. After paying a deposit, you can clear the balance in installments. Hire purchase also offers flexibility in how much a buyer pays monthly and the duration of the payments.
3. Fixed interest rates
Hire purchase is one of the best financing options available, considering that buyers enjoy low-interest rates on the installments. The interest rates are also fixed and do not change at any point during the hire purchase agreement. Fixed payments allow you to budget ahead and take control of your finances.
Cons of hire purchase
Hire purchase also has some disadvantages that a customer ought to learn before signing a hire purchase contract.
1) Higher overall cost
When you compare the total cost of items in a hire purchase deal to the cash price, the hire purchase price is higher. This is a result of the interest charges on the installments.
2) The risk of losing the asset
With high purchase, the asset acts as the security. This means that missing any payments can see the hire purchase dealer recover the asset. The buyer loses any payments they have made to that point.\