What is a hire purchase agreement?
Hire purchase agreements are contracts in which the buyer agrees to pay in regular instalments; the seller retains legal ownership of the goods subject to the contract until all payment instalments are made. Under a hire purchase agreement, the buyer usually makes an initial down payment, followed by regular instalment payments, which may include interest and fees. The total cost of the goods may be higher than if the buyer had paid for them upfront due to the added cost of interest and fees in some instances. Once the buyer has made all payments, ownership transfers to them; however, if the buyer fails to make a payment, the seller may repossess the goods. Hire purchase agreements are often used for expensive items like cars, appliances, and furniture. Customers may use a hire purchase agreement when they cannot afford an item upfront.
Hire Purchase examples
Hire purchase agreements are offered for customers to finance various goods and services; some common examples in which they are used will be provided.
- Hire purchase cars: Hire purchase agreements are often used to purchase vehicles as they are expensive goods many people need to make money. A typical arrangement for these types of contracts involves an initial deposit and regular payments for a fixed period ranging from 3-5 years.
- Hire purchase furniture & appliances: Furniture stores often offer hire purchase agreements for customers who want to purchase expensive items like sofas or bedroom sets. The buyer makes regular payments until the total amount is paid, and the furniture belongs to the buyer once the final payment is made.
- Hire purchase construction equipment: Construction companies sometimes use hire purchase agreements to purchase heavy machinery like excavators or bulldozers.
- Hire purchase musical instruments: Music stores may offer to to hire purchase agreements for customers who want to purchase expensive musical instruments like pianos or guitars.
Risks for companies offering hire purchase agreements
Companies who provide hire purchase agreements may face various potential risks relating to their credit, assets, interest rates and the market; these will be explored below.
- Credit risk: Companies offering hire purchase agreements trust their customers to make agreed-scheduled payments on time; if a customer fails to make a payment or defaults on it, revenue could be lost, and legal action to recover the good might be necessary.
- Asset risk: The company offering these types of contracts has ownership over the goods until the final payment is made, however, if the goods in question are damaged or lost before the final payment has been made, the company might face a loss.
- Interest rate risk: Companies offering hire purchase agreements are exposed to interest rate risk as the cost of funds borrowed to finance the goods may rise during the hire purchase period.
- Market risk: The value of the goods offered for hire purchase may fall during the hire purchase period, which could result in a loss for the company.
- Regulatory risk: Companies offering hire purchase agreements must comply with consumer protection laws and regulations, which can be complex and subject to change. Failure to comply can result in legal and financial penalties.
To mitigate these risks, companies may employ various risk management strategies, such as credit checks on customers, insurance coverage on assets, and monitoring of interest rate movements. They may also have robust legal and compliance departments to ensure they meet regulatory requirements.
Legal Advice
If you are facing issues regarding the implementation or enforcement of a hire purchase agreement as a business you can always contact Legal Kitz to assist you. To arrange a FREE 30-minute consultation with one of our highly experienced solicitors, contact us at [email protected] or 1300 988 954. You can also check out our sister company – Business Kitz’s Subscriptions, to access our full range of legal, commercial and employment document templates to begin your business with a solid foundation that ensures compliance.