If you want to make an expensive purchase for your home or business but haven’t got the funds for it, you can opt for a hire purchase (HP). It’s a leasing type that allows you to possess and use things as you pay back their complete amount in installments.
In this post, we will explore the concept of hire purchase and its pros and cons in complete detail. If you’re considering acquiring a HP, read along to make an informed and well-calculated decision!
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What IS A Hire Purchase?
Hire purchase is the UK’s term for an installment plan. In this agreement, the buyer agrees to pay a certain amount as a down payment and then pays the remaining amount (compounded with interest) in installments.
The down payment is usually 10% of the total cost of the item, while the installments can stretch up to five years or more. You can choose a plan that’s affordable for you.
Ownership status is the only difference between a hire purchase and an installment plan. In the USA, traditional installment plans give you immediate ownership. However, anything acquired via hire purchase doesn’t grant you immediate ownership of the asset. You will get complete ownership only after you pay the complete amount.
At the same time, HP is more accessible compared to installment plans. That’s because you can acquire HP even if you have a low credit score. You can see this article prepared by Westpac for more information about HP and how it compares to its major alternative — leasing.
Pros Of Hire Purchase
1. Fixed Interest Rate
Hire purchase loans come with a fixed interest rate. This benefits the hirer by ensuring that the interest amount does not significantly increase over time. You can calculate the amount of interest that you’ll have to pay beforehand.
2. Right To Terminate
Hire purchase is more of a rent-to-own transition, meaning that the monthly amount you’re paying is like the rent of the asset you’re using. The amount serves as rent as well as an installment that eventually adds up to the total price of the asset.
This is beneficial for the hirer because it gives them the right to terminate the plan anytime they want. If you feel that the asset you got via a hire purchase plan is not a worthy investment, you can return the asset and cancel the plan.
Unlike installment plans, you’re not bound to pay the entire amount irrespective of whether you want to keep the asset or not.
3. Accessibility To Anything And Everything
If you want to purchase super expensive equipment for your company’s growth, you can make the leap with hire purchase. In case it doesn’t work, you can terminate the contract instead of going into debt. Plus, you don’t need a high and stable credit score to acquire a hire purchase loan.
4. Backed By The Finance Company
When you purchase equipment or any other good via hire purchase, the financing company bears the maintenance and repair costs. They do so because it’s their property until you clear the last payment.
Businesses can use this to their benefit by trying out new technology in their respective industry. This can help them compete well with other big industry players and boost profits.
Cons Of Hire Purchase
1. Lack Of Ownership
One of the biggest cons of hire purchase is the lack of ownership. You cannot make any changes or upgrades to the asset unless you discuss it with the financing company. Plus, if you fail to make timely payments, the financing company may seize the asset.
2. Higher Overall Cost
Hire purchase plans are flexible in terms of eligibility for the loan and returns. But this comes with an additional cost.
Usually, the overall amount that you’ve to pay back to the financing company is 10 percent more than the total cost of the asset. It can be more or less than 10 percent, depending on the financing company, its policies, purchased goods, etc.
3. Mishaps Affect Credit Score
You do not need a strong credit score to get a hire purchase loan approved. However, if you forget to pay your monthly dues, it will negatively impact your credit score. If your credit score falls, future loan opportunities might become limited for you.
4. More Interest For Low Credit Score
In addition to limiting your loan options, a low credit score also influences the interest rate you get for any loans you’re able to secure. If you have a low credit score, you will get a higher interest rate, which is an important consideration before taking out a business loan.
Is A Hire Purchase Loan Good For You?
Well, this depends on your current financial status and the purpose of acquiring a hire purchase loan.
If you aim to purchase something for your business’s growth, it’s worth it. But if you seek a hire purchase loan for an expensive car or something similar, we will not recommend it. That’s because the overall cost you pay will be much higher than the original cost of the asset.
