Hire Purchase Agreements
Reviewed by Aug 27, 2020| Updated on
What is Hire Purchase Agreements?
Hire purchase is an arrangement made while buying expensive goods. The consumer makes a downpayment during the purchase, and the outstanding balance will be paid in instalments with an interest charge.
Though the concept of hire purchase is not very prevalent in India, there is a similar concept called a mortgage. Usually, mortgage involves pledging an item previously owned by the borrower in order to fetch some spending money, and the ownership of the item will be transferred to the lender as long as they repay the debt. In hire purchase, the borrower purchase a new item.
In both cases, the ownership of the purchased goods will be transferred to the lender until the borrower pays off the whole debt.
Understanding Hire Purchase Agreement
The rent-to-own concept is very similar to hire purchase. The lessee will pay the rent for a property or a vehicle over a period of time. If the lessee pays the actual sale price of the property or vehicle, he will have the option to own the property or vehicle at any time.
Customers use this option to own expensive items because the cost can be spread across several years rather than having to pay a huge sum at once. Again, the borrower will not be the owner of the item until all the payments are made. If the borrower defaults on repayments, the lender can possess the item or sell it to fill the default payments.
Merits of Hire Purchase
Companies from sectors, such as plant hire, road freight, construction, manufacturing, transport, and engineering, which are short of working capital can deploy assets and machinery on hire purchase.
The return on capital employed (ROCE) and return on assets (ROA) of a company can flatter with a hire purchase agreement.
Demerits of Hire Purchase
- They can turn out very expensive in the long run because a huge sum goes out as interest payment.
- For businesses, hire purchase means added administrative complexity.
- The notion of instalment payments can make individuals and companies purchase beyond necessity.
- A very high-interest rate may be associated with the agreement, which may not be stated explicitly.