Types of hire purchase agreements

Credit is a crucial financial solution in acquiring goods for business and personal purposes. Numerous credit agreements in the financial sector are designed to satisfy their client’s needs. An example is the hire purchase or rent-to-own agreement. In a hire purchase agreement, there are two main parties. These are the buyer interested in getting an asset and the seller who legally owns the asset. The buyer may not have all the funds required to purchase the product. Therefore, they settle on the type of hire purchase agreement suitable for both parties. The downside of these agreements is their high interest.

How does hiring purchase work?

The first step in securing the asset requires the buyer to provide a down payment. The buyer pays the remaining amount in instalments that incur interest. Both parties negotiate an interest rate and period of repayment. 

After paying the down payment, the buyer can use the asset. Only after paying the full amount is ownership transferred from the seller to the buyer. This condition protects the seller in such a credit agreement.

Hire purchase of agreements are known as rent-to-own transactions. Financial institutions adopted this term because the buyer can pay for the product in full during the agreement period. 

Features of a hire purchase agreement contract

The buyer and seller must have a written contract detailing the terms and conditions involved in the credit agreement. This contract is legally mandatory regardless of the type of hire purchase agreement. A written contract may include these features.

• The item that is being referred to in the agreement.
• The asset’s cash price.
• The amount designated for each instalment.
• The proposed date of paying each instalment.
• The total hire purchase price with the initial down payment and the sum of instalments.
• Both parties’ names and addresses.
• A signed statement whereby the buyer guarantees to share the asset’s location with the seller.
• A signed statement whereby the buyer has ten days of reconsidering the agreement after receiving a copy.
• All written contracts must include the term ‘Hire Purchase Agreement.’
• The fees, charges, and penalties involved in the event of defaulting on the loan.

Types of hire purchase agreements

There are two main types of hire purchases based on the functional purpose of the asset involved. These types are the consumer and industrial hire purchase agreements.

• Consumer hire purchase

In this type of hire purchase, the rented goods are for personal purposes. The buyer does not intend to use these products for business transactions. Instead, the asset is for the household. Moreover, the renter is not a business or company. They are natural people.

• Industrial hire purchase

A financing institution leases the asset to a company or industry for business purposes. The buyer may hire industrial equipment and purchase the machinery later. 

The main features and benefits of industrial hire purchase include a fixed monthly payment, allowance for early settlement, and the possibility of a variable interest rate on instalments. Licensed associations, registered clubs, privately-owned companies, and limited public corporations are eligible for this hire purchase.

Termination of hire purchase agreements

The circumstances listed below are grounds for termination of any type of hire purchase agreement.

• The terms of the written contract 

The agreement states the various scenarios where both parties can discontinue the agreement. Most contracts mention the return of the asset by the buyer, the seller’s notice of termination in case of breach of terms and conditions, and the hirer’s notice of termination of the contract as the legal circumstances permitting termination.

• Renewal of the agreement

Both parties negotiate a new contract and terminate the initial credit agreement.

• Notice of termination

Either the buyer or seller can give a notice requesting the termination of the hire purchase agreement. 

• Full repayment

The agreement is considered null and void once the buyer settles their debt. 

• Release of one party from the agreement

The seller may release the hirer from the contract on various grounds. These reasons may be the full repayment or breach of contract. 

• Time-lapse

The buyer is given a period to pay for the asset in full but fails to.

• Frustration

The terms and conditions stipulated in the agreement are not met because of some act or event. The contract is discontinued, and both parties are released from the obligations of the hire purchase agreement.

Conclusion:

The general public, business owners, and industry leaders can greatly benefit from the different hire purchase agreements. These rent-to-own agreements are useful in purchasing a personal asset such as a car and acquiring expensive machinery for various industries. Industries that commonly include hiring purchase agreements in their financial operations are the construction, engineering, manufacturing, and transport sectors. Furthermore, there are some disadvantages posed by hire purchase agreements. They may comprise a high-interest rate leading to the escalation of the cumulative cost. Buyers who opt for hire purchase agreements should carefully consider the terms and conditions incorporated in the written contracts.