But what is hire purchase and why would you choose it?
What is Hire Purchase?
Hire purchase, usually abbreviated to HP, is a type of loan extended to an individual or business which involves borrowing an agreed amount and then paying it back in instalments.
Usually, you’ll also need to put down a deposit.
However, whereas with other types of borrowing, such as credit cards or bank loans, you own the goods immediately, with HP, you are hiring the item(s) for the duration of the agreement and do not own them until you have finished paying the loan.
One of the most important things to be aware of when entering into an HP agreement is that while you are repaying the loan, since you do not yet own the purchase, you are not allowed to sell or otherwise dispose of it without the lender’s permission.
If you don’t obtain permission, you are committing a criminal offence and could be prosecuted.
In addition, if you fail to keep up with your repayments, the lender could repossess the item(s), as well as keep the monies you’ve already paid.
The Advantages of Hire Purchase
HP can be a very flexible way of managing your finances. Before signing on the dotted line, you can generally negotiate the length of the loan, which will usually be fixed term, as well as the size of the deposit, meaning you can tailor it to your personal circumstances.
1. Longer Terms Means Lower Repayments
In general terms, the longer the term of the agreement, the lower the monthly repayments, making HP a highly affordable way of buying expensive items, such as cars.
You can also often include varying terms, such as seasonal repayments, so if you have a varying income over the year, you can set up the HP agreement to make allowances for leaner months.
In addition, interest rates are fixed, so you can budget appropriately regardless of changing bank rates.
2. Balloon Payments for Even Lower Instalments
You might choose to include a ‘balloon payment,’ which is a lump sum you pay at the end of the contract to reduce your repayments even further.
Before you opt for a balloon repayment, make sure you think carefully about how you’ll be able to finance this. While it might be tempting to go for the lower payments in the interim, it can be heart breaking to pay off your loan only to see your goods repossessed because you can’t afford the balloon payment at the end.
3. Great for Businesses
If you are a business owner, HP is an especially attractive option, since it lets you buy and use essential equipment immediately without losing a large amount of business capital, with the added advantage of owning the equipment once you’ve repaid the loan.
4. Benefits over Leasing
In a lease agreement, you hire goods but your rental payments do not count towards a purchase, so you can pay large sums of money but have nothing to show for it months down the line.
Even better, you don’t have to pay VAT on HP repayments, but you do on lease repayments.
The Disadvantages of Hire Purchase
1. You Must Keep up Payments
Once you’ve signed an HP agreement, if your circumstances change and you can no longer afford to keep up with instalments, you could lose the goods it covers, no matter how much of the loan you’ve repaid.
If you fall behind with payment, your credit rating can also be negatively affected.
2. You Don’t Own Outright
As mentioned earlier, you do not own your purchase during the duration of the HP agreement and since it doesn’t belong to you, it is not protected should you become bankrupt.
3. Higher Costs
Finally, since HP is a loan with interest, it is more expensive than paying cash for something. If you have a bad credit rating, you could pay even more because you’ll be considered to be high risk.
Terminating a Hire Purchase Agreement
You have the right to end an HP agreement at any time. All you have to do is inform the lender in writing and return the goods.
This is a useful option if you find that you’re struggling to keep up with repayments or you simply don’t need the items any more.
This may be a better choice than waiting for the lender to end the agreement because it will limit the amount you have to repay and give you a certain amount of control over the situation.
Leaving it to the lender to terminate the agreement could result in your owing more than if you’d ended it yourself.
No Right to Refund
However, before you decide to terminate your agreement, be aware that you will not be entitled to any form of refund on the amount you’ve already paid.
If your payments total less than 50% of the total price of the goods, you may still owe more, since the lender is automatically entitled to this amount under the terms of the agreement.
If, on the other hand, you’ve already paid more than 50%, you shouldn’t normally need to pay any extra.
Check Your Documents
If in doubt about how much you may owe, refer back to the credit agreement documents you signed when you took out the loan, which should include a clause detailing the amount you would need to pay in the event of a termination.
You should never have to pay the full loan amount if you end an HP agreement before the final payment, so if your lender tries to argue that you still owe the full amount, seek legal advice immediately.
If the lender decides to end the agreement, usually because you have defaulted on payments, they may be able to repossess the items covered by the loan.
If you’ve paid less than a third of the total loan amount, they don’t need a court order to take back the goods, but if you’ve paid more, they’ll need to obtain a court order before repossessing the items.
Check your HP agreement to see how much one third would be.
Arrange to Sell the Goods Yourself
Having repossessed the goods, the lender will usually auction them off and use any funds raised this way to repay your debt.
If they are unable to pay off the loan in full at auction, you’ll still be liable for the outstanding amount as well as any court costs.
In this circumstance, it’s always worth asking the lender if you can try to sell the goods yourself first, because you’ll usually be able to get more money this way.
Payment Protection Insurance
Payment Protection Insurance, or PPI, has received a bad press because it’s been mis-sold in the past.
However, it can be useful in certain circumstances, e.g. if you have to take time off work due to ill health, and many HP agreements include PPI.
If you are unsure whether your HP agreement includes PPI, refer back to your loan documents or have a legal adviser check them for you, e.g. at the Citizen’s Advice Bureau.
Before deciding to terminate an HP loan, check to see whether you can make a claim against your PPI first, because you may find that the PPI means you don’t have to cancel the agreement after all.
If you or the lender do decide to terminate your HP, you will probably need to cancel the PPI separately, since it is frequently an independent agreement.
Remember to always put any cancellation in writing.
Are you considering taking out a hire purchase agreement? Have you done so in the past and found it useful or have you had problems? Let us know your experiences in the comments below.
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