Hire purchase - what you need to know

September 20, 2022

In recent years, access to credit has transformed the way individuals make purchase decisions. The availability of different payment options like prepayments, lay-by options, hire-purchase agreements and leasing arrangements have enabled consumers to afford items that would otherwise be out of reach with the traditional cash payments.

In this article, we will explore what hire-purchase agreements are and how they impact our financial decisions. 

In short, a hire purchase is a credit agreement where a buyer is allowed to take possession of the item being purchased in the course of the contract, however, ownership of the item will not transfer until the purchase price is settled in full.

In contrast to a lay-by agreement, the seller keeps the item being purchased until the payment in full is received from the buyer. The most common hire purchase agreement is the way most individuals purchase vehicles as well as furniture. 

Like any other credit agreement, items being sold on the hire-purchase arrangements need to compensate the seller for providing financing and thus the total price charged incorporates an interest component. In addition, most of the items being sold under hire-purchase agreements are assets that depreciate over time. 

Hence, the seller also takes the risk that should the buyer not be able to make the payments as agreed, the item being repossessed may not carry the same value as the balance outstanding thus the interest charged also tend to be slightly higher to factor in the increased risk. 

If you are making use of hire-purchase agreements, here are a few things to take note of:

  1. Hire-purchase agreements are a form of debt and thus once taken, one needs to honour the commitment to ensure that it does not have a detrimental effect on one’s credit report, which is ultimately used as a blueprint by future lenders. Timely payment toward the service provider will positively influence your credit report whilst missed or late payments will make it costly for you to get future debts.
  2. Most hire-purchase contracts also provide an inherent credit life cover that one pays for as part of consenting to the terms and conditions of the agreement. This implies that should one die while still owing part of the debt under the agreement, the seller will not need to repossess the item, but rather claim from the insurance provider with which the debt is insured.
  3. Given that ownership does not transfer until the price is settled in full, refrain from selling the item in question unless you intend on settling the remaining balance with the proceeds from the sale. 

Just like any other financial decision, evaluating purchase options is different for individuals. The goal is always to try and match the method of financing used to the item being purchased. The golden rule is to always ensure that the terms of the financing should not exceed the useful life of the item bought. 

*For more information, do check out our business-related videos on YouTube “Money matters with Budget Bee -Namibian Youtuber”. Klestina Kauhondamwa is a Chartered Accountant by profession.

Rate this item
(0 votes)
Last modified on Friday, 23 September 2022 02:01