In Kenya, hire purchase has become a common financing option for buyers looking for high-value items. The high inflation and hard economic times that citizens are experiencing make it hard to save enough cash to purchase assets outright. Hire purchase, with more common names such as lipa pole pole, lipa mdogo mdogo, or lipa later, is now a common option for most buyers. In this post, we will look at the basics of hire purchase.

Hire Purchase Meaning

High purchase is a purchase option where one doesn’t need to pay the total cost upfront to acquire assets. The buyer only pays a fraction of the total cost as the down payment and completes payment in the form of installments. While one can acquire the assets immediately after paying the deposit, one only become the owner of the assets after paying the last installment.

Features Of A Hire Purchase Agreement

These are some of the features of a hire purchase contract that differentiates it from other modes of purchase.

  • A buyer acquires the assets immediately after paying the deposit.
  • The hire purchase dealer remains the owner of the assets until the buyer pays the last installment.
  • The total cost of the asset is made through a deposit and periodic payments known as installments.
  • A flat rate interest is charged on the installments, thus making the total cost higher when compared to the cash price.
  • On completion of paying the installments, the seller transfers the ownership title to the buyer.
  • When the buyer defaults on payments, the hire purchase provider can repossess the asset. The buyer loses any payments they have made to this point.
  • Types Of Hire Purchase Agreements

There are two main types of hire purchase agreements:

In the first hire purchase agreement type, the consumer enters directly into a hire purchase contract with the seller. In this case, a buyer makes a down payment to the seller and makes installments directly. The buyer becomes the owner of the assets after making the last payment.

In the second hire purchase contract type, a financier is involved. This is a lending institution, that purchases the asset from the seller on behalf of the buyer, and as the financier enters, into a hire purchase agreement with the buyer. In this case, the lender becomes the owner of the assets until the buyer pays the last installment.

Hire purchase calculations

The total hire purchase price is calculated using this formula:

Hire purchase price = Down payment + (Installment amount X number of installments)

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