Hire Purchase Explained In DetailAugust 28, 2017
It is not always possible to buy pricey items such as cars or electronics up front. Borrowing a loan often comes off as the most prominent especially when the buyer prefers to own the item outright and evade annual restrictions such as a car's mileage. The second most popular preference is a contract purchase which has a strong likening to hire purchase. After the contract’s life span, the client can either keep the item after making a huge payment, replace it with another or return it to the seller. Other payment methods of buying expensive possessions include personal contract hire which limits the item’s use. Hire purchase is the simplest payment method since the terms and conditions are favorable buyer-biased.
How does hire purchase work?
Hire purchase is the agreement between the seller and the buyer to make a down payment on an item and complete the arrears in installments. The term which was originally coined in the United Kingdom is similar to the analogy of renting to own. The buyer is renting out the item and only claims ownership after the final payment.
Step by step procedure
1. The customer deposits an initial amount as down payment.
2. The seller determines the period in which the rest of the amount ought to be completed and the monthly interest rate.
If the car costs $800, the buyer can deposit $400 upon agreeing to the contract’s terms and conditions. If the payment is due in ten months, the monthly payment will exceed $40 a month to cover the interest fee.
There are situations where the process is not clean cut as stipulated and involves conditions that may complicate the transaction. What happens if the buyer wishes to end the hire purchase transaction?
Breaking a transaction’s life incurs additional penalties. It is advisable to communicate the change of terms to the seller before terminating a contract to reduce complications. In the case of buying the item before the end date, the seller uses a preexisting formula to calculate the balance, which is usually lower than the preplanned value. If the buyer decides not to buy the item, the half rule implies that half the hire purchase ought to be completed before termination of the contract.
Can the seller reclaim the item before the end of the transaction?
In the case of complications, the seller can only repossess the item if the buyer has not paid two-thirds of the required amount, inclusive of the down payment. Legal proceedings are undertaken to ensure that both the seller and the buyer adhere to the preset regulations, which may vary with companies.
How to manage damage of goods
The Sale of Goods and Supply of Services Act 1980 states that all merchandise should be functional for their intended purpose and display quality. A consumer can request a full refund from the seller if the goods are damaged or request for repairs for which the seller will compensate. Any complications can be quickly rectified with legal intervention.
What happens when the consumer misses a payment?
The repercussion of missing a payment vary with every merchant. In most cases, the parties can amicably decide to spread the amount over the remaining installment period or extend the transaction’s life span.
Additional tips regarding hire purchase
There are pros and risks to every plan one may choose to buy a product. Understanding these processes in detail ensure that one does not get into avoidable pitfalls.
1. Deposit values vary with traders and are usually relatively low.
2. The interest rate is fixed.
3. There is no final amount required to finalize the transaction.
4. The car cannot be used until the transaction reaches its end date.
5. Several missed payments could lead to repossession of the car.
6. The repayment plan is flexible.
7. The length of the installment repayment period directly affects the amount due every month.
8. If one uses a finance company to execute the transaction, there may be a limit as to which manufacturer or dealership will be contracted.
It is prudent to go over the terms of the deal with an accountant to determine the best payment plan. Additionally, a competent attorney will process any legal concerns between the parties and prevent further complications. Hire purchase results in a small excess over the initial fee due to interest rates but is convenient when one cannot afford to pay in one lump.
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