Hire Purchase Agreements - Pros & Cons
Is it Better for a Consumer to Buy on Credit or Pay in Cash?
Apr 19, 2009
A hire purchase agreement is a conditional sale and legitimate title doesn't change hands until the final monthly repayment has been paid. The consumer has possession of the goods, but they cannot be sold until the item has been fully paid-off. Hire purchase (better known as HP) is regularly offered by merchants to enable consumers to buy cars and a variety of white goods, including dish washers, laptop computers and fridge freezers. Whilst some merchants offer interest-free credit, others charge a high interest rate when a consumer has a bad credit rating.
The Advantages of Hire Purchase Agreements
- Spread the cost of finance. Whilst choosing to pay in cash is preferable, this might not be possible for consumer on a tight budget. A hire purchase agreement allows a consumer to make monthly repayments over a pre-specified period of time;
- Interest-free credit. Some merchants offer customers the opportunity to pay for goods and services on interest-free credit. This is particularly common when making a new car purchase or on white goods during an economic downturn;
- Higher acceptance rates. The rate of acceptance on hire purchase agreements is higher than other forms of unsecured borrowing because the lenders have collateral;
- Sales. A hire purchase agreement allows a consumer to purchase sale items when they aren't in a position to pay in cash. The discounts secured will save many families money;
- Debt solutions. Consumers that buy on credit can pursue a debt solution, such as a debt management plan, should they experience money problems further down the line.
The Disadvantages of Hire Purchase Agreements
- Personal debt. A hire purchase agreement is yet another form of personal debt. it is monthly repayment commitment that needs to be paid each month;
- Final payment. A consumer doesn't have legitimate title to the goods until the final monthly repayment has been made;
- Bad credit. All hire purchase agreements will involve a credit check. Consumers that have a bad credit rating will either be turned down or will be asked to pay a high interest rate;
- Creditor harassment. Opting to buy on credit can create money problems should a family experience a change of personal circumstances;
- Repossession rights. A seller is entitled to 'snatch back' any goods when less than a third of the amount has been paid back. Should more than a third of the amount have been paid back, the seller will need a court order or for the buyer to return the item voluntarily.
Subject to a credit check, hire purchase agreements are an excellent way for consumers to buy on credit and spread the cost via a series of affordable monthly repayments. Whilst being in a position to pay in cash is preferable, interest-free credit can be a better option. Always remember that this is a form of personal debt and consumers should be careful not to over-extend themselves financially.
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