Hire Purchase (HP) transactions take place everyday for various consumer goods such as furniture, appliances, televisions, and even cars. Several retailers offer these items for sale and tempt you by offering you to “buy on terms”, or put another way, pay for the item with instalments over an agreed period of time (usually up to three years).
It sounds pretty straightforward: bring a job letter, payslip, utility bill (or some variation of these requirements); sign a few forms; and walk away with your item. But underlying the apparent easy transaction is a fair amount of complexity. The purpose of this post is to walk you through the details so you can make an informed decision whether HP is right for you.
Comparison to other personal loans
Before diving in, let’s review a “normal” lending transaction (e.g. from a bank) because it will be useful to compare this to a HP transaction.
When you take a regular bank consumer loan, the bank is only fundamentally interested in your repaying the loan without problems. They are less interested in what you are using the loan to do, except if they wish to take a security interest in the item you are buying. This means, in the event you are unable to repay the loan, they have access to collateral that was used to secure the loan. It does not necessarily have to be the item you purchased. Because they are not truly interested in your use of the funds, most consumer loans are unsecured.
The important point to note is the bank does not own the item you are buying (or that you have put up as collateral). YOU are the owner. For example, if you took an unsecured loan and purchased appliances, you own the appliances and could sell them the next day if you wished. The bank only wants to be repaid.
What is Hire Purchase?
A HP transaction is quite different from what we just described. As a matter of fact, have you considered why it is described in such odd terms, “Hire” and “Purchase”? Let’s see.
- A HP transaction combines elements of both a loan and a lease, which sometimes makes it difficult to understand. As a matter of fact, most persons tend to consider it only as a loan i.e. they are buying the item with HP financing.
- In substance, however, a HP agreement is the lease or hire of goods with an OPTION to purchase.
- The transaction has two parties: a “Hirer” (You) and an “Owner” (the Retailer in most cases).
- Although you can leave with the item, the retailer retains ownership; you only have possession. Because you are not the owner, you are not permitted to sell, alter it, etc.
- Let’s say you entered into a 3-year HP contract. During the three years, you are using something that does not belong to you. So, in fact you are really renting the item, or put another way, you are hiring or leasing it. (The “hire” in hire purchase.)
- Because you do not own the item, you can return it during the contract period, once you are up-to-date with your payments and the item is not damaged.
- The retailer, as owner, has rights to repossess the item if you default on the contract.
- If you want to own the item, you have to exercise the option to own, which is usually by making all your contracted payments.
What does the law say
In Trinidad and Tobago, HP transactions are governed by the Hire Purchase Act, Chap 82:33. While this is an important piece of legislation, don’t worry, we aren’t going to repeat a lot of legalese. We’ll identify the main points and just emphasize that a legal advisor could be needed in the case of dispute, etc.
- The Act only applies to transactions that are less than $15,000.00
- The retailer is required to show you the cash price as well as the hire purchase price. There is a good reason for this, which we will explore in Part 2.
- The agreement must include a notice to let you know that the hirer (You) can terminate the agreement by giving the owner notice and paying off any arrears of instalments.
- The Act sets the rules for repossession. If you paid 70% (or more) of the HP price, the retailer cannot repossess the goods without going to court first. Where less than 70% has been paid, the retailer must give you 21 days written notice of their intention to repossess.
- The Act protects you from a retailer taking advantage of you in certain ways.
- The Act also tries to protect the retailer, for example, by requiring you to inform them of the location of their property
Areas of focus in a Hire Purchase transaction
Please note, this is not a complete list. You should ensure your retailer explains all terms to you.
- A component of a HP transaction is financing, which may be provided by the retailer or a finance company. You should know the parties involved. If there is a finance company, they are very likely the owner of the item (the retailer sells the item to them). You continue to be the hirer.
- You may or may not be required to make a deposit. Some agreements may say this is your payment for the option to purchase the item.
- Because you don’t own the item:
- The agreement could refer to paying monthly “rent” of an agreed sum.
- You have to take care of it (you will have to pay for damages) and inform the retailer of the item’s location or when it will be moved elsewhere.
- You have the right to return it, once you are up-to-date with your payments and the item is not damaged. Make sure you clearly understand the process and costs involved.
- Note the repossession rules in the section above “What does the law say”. If the goods cost more than $15,000.00, the owner usually reserves the right to repossess the item without notice and enter your premises to do so (you likely agree to this in the contract).
We’ll cover these next three points in Part 2:
- The interest rate implied in your contract.
- Early repayment and interest rebates.
- Insurance and warranties.
Know that you’ll probably be disliked for asking questions about these points! But this is what transparency in sales transactions is all about.
Advantages of using Hire Purchase
There are several advantages to buying goods on HP:
- As a form of lending, it allows you pay for items over time, while still being able to get immediate use.
- Financing is usually arranged in-store, which makes it a convenient one-stop shop to buy and finance.
- Many people regard HP credit as easier to obtain when compared to traditional lenders e.g. banks.
- As you are only renting the item (until you pay fully), you have the right to return it.
Disadvantages of using Hire Purchase
The main downsides of buying goods on HP are:
- HP is a very expensive form of financing. We’ll cover this at greater length in Part 2.
- In an effort by retailers to present an easy transaction, the uninformed may not fully understand the complications involved.
- As you do not own the item until it is fully paid, you do not have ownership rights as in other purchase transactions; for example, you can’t sell the item and you could be liable for any damage.
- When dealing with financial institutions, if a dispute arises, you have recourse to the Office of the Financial Services Ombudsman (https://www.ofso.org.tt/). As most HP providers are not financial institutions, The Ombudsman’s services will not be available to you. We’ll discuss the role of the Ombudsman in a separate post.
In Part 2, we discuss the financial aspects of HP transactions and provide some suggestions to consider when trying to decide if HP is right for you. In the meantime in you have thoughts or experiences to share, we’d love to hear from you in the comments below!