Hire purchase is a method of buying on credit. In the United States, the method is called the installment plan. A store that sells goods on hire purchase usually requires that the buyer pay part of the price of an article at the time of the sale. The buyer then must pay equal parts of the remainder at stated times thereafter, until the bill is paid in full. These payments are called deferred payments, and may be extended over varying periods.
Buying goods on hire purchase differs from buying by most other methods of credit because the buyer does not become the owner until the last installment has been paid. If the buyer fails to pay the installments, the store will repossess the goods.
Goods often bought under hire purchase agreements include refrigerators, televisions, furniture, and cars. Companies also often enter into hire purchase agreements to buy office machinery.
There are several advantages to buying goods under a hire purchase agreement. The buyer does not need to wait to save up the full price of the goods. Also, goods purchased under a hire purchase agreement may be covered by a guarantee, which means that if something goes wrong the buyer can withhold payment until the goods are repaired or replaced. One of the main disadvantages is that high interest rates may make the total cost of the goods far more than the cash price. The need to buy the goods on hire purchase may also limit the choice of goods available because not all traders provide that kind of credit.
The advantage for traders is that they can sell more goods than if they only accepted cash sales. They can charge more for the goods and make more profit. But there are also disadvantages. If the goods are not paid for, and the trader has to repossess them, they may come back damaged so that they cannot be sold to anyone else. The trader also needs more money available to buy more stock because the initial payment will be low. Because of these problems, finance companies have been formed. They give the cash price to the trader minus a charge for providing the service. Large trading companies and retail groups often form their own finance companies.
In many countries, hire purchase is declining in importance. Credit cards give a buyer immediate ownership of the goods, with greater flexibility in the method of payment.
