Hire purchase advantages and disadvantages determine whether a higher purchase is a good idea or not. Hire vendors also use these pros and cons to determine whether to extend this form of financing to their hire purchasers. Some buyers will often avoid hire purchase because of its disadvantages. Buying in installments is often considered by many consumers to intend to avoid the disadvantages of hire purchase. Sellers who want to avoid the drawbacks of an installment system are likely to convince their buyers to consider a hire purchase offer available.
Advantages of Hire Purchase
1. Fixed monthly payment
After the down payment, the remaining balance is payable in installments. These installments are payable over the period agreed between the hire purchaser and the hire vendor.
The time to repay the remaining balance and interest is calculated. Then fixed installments are to be paid over this period and determined. This is what the hire purchase has to pay if they won’t request an adjustment.
2. Affordability of quality
Hire purchase enables hire purchasers to acquire high-quality goods that could have been otherwise expensive in a cash payment. The hire purchase gets an opportunity to enjoy the quality and reliable goods as they pay for the balance. This would not be possible if they had to pay cash to acquire such goods. Ideally, hire purchase improves the quality of life for the hire vendor.
3. Creditworthiness is not considered
When taking a hire purchase form of financing, it is more of a gentlemen’s agreement. The hire vendor is not concerned with one credit score. Dozens of supporting documentation are not demanded from hire purchasers for their credit history. This allows the buyer to enjoy financing and improve the quality of their life even when one has a poor credit score.
4. Low-interest rates
The rates charged on the hire purchase agreement are way more affordable compared to other loans. The rates are relatively low and could be spread over a varying time frame as agreed by the hire vendor and purchaser.
5. Accommodates repayment adjustments
If one struggles to pay their installments, they can approach the hire vendor for a slight adjustment. This adjustment cushions the hire purchaser from defaulting and protects the interest the hire vendor is earning.
In other cases, the hire purchaser could feel that the repayment period is long and want to reduce it. They can approach their higher vendor and adjust payable installments.
Disadvantages of Hire Purchase
1. Goods can be repossessed
The ownership of goods bought under hire purchase remains with the hire vendor. The hire vendor can therefore repossess these goods in case of installment default. Hire the purchaser loses the down payment and installment already paid in case of such repossession.
2. Ownership belongs to the hire vendor
Since the hire vendor is the legal owner of goods until the settlement of the last installment, the hire purchaser cannot enjoy all benefits of ownership. For instance, one cannot sell the item in question (for example, where the item’s purpose is accomplished).
Such an item has to lay idle in the custody of the hire purchaser until the installment is fully settled.
3. It is an expensive way of buying in the long run
When one calculates the amount of money paid as installments, down payments, and interest, a lot is paid over the market price. One ends up paying significantly more than a person who paid in cash.
4. Depreciation of goods
Since the items in question can only be sold after full installments, one has to keep them. The repayment period of these installments could be shorter. This implies higher depreciation of such items. When one settles all installments, the resale value could have steeply depreciated.
5. Little or no discount
Hire vendors allows little or no discounts to hire purchasers. This is disadvantageous because the hire purchaser is locked, paying almost the entire amount of the marked price. It is thus better to buy on a cash basis to enjoy discount benefits.
Is hire purchase a Good Idea?
The answer to this question depends on personal experience with a hire purchase agreement. In other cases, it depends on stories that one has heard elsewhere from close friends or just random stories.
A person who bought goods successfully through hire purchase would say it’s a good idea. Another person who lost their goods to hire a vendor in a repossession would say it’s a bad idea.