To Hire means to use someone else’s property for payment for a duration of time.
Goods sold on higher purchases are durable and expensive such as; vehicles, furniture, electronics, buildings etc.
Hire purchase is a method of hiring property with an option to buy.
Hire purchase price is given by cash price plus hire purchase interest.
Terms of payment for a hire purchase
- The buyer pays an initial deposit (down payment
- The remaining amount (balances is paid in equal monthly installments spread over an agreed period of time
- The possession of goods is given to the buyer immediately but ownership remains with the seller/ vendor until the last instalment is paid.
- The installments paid include interest which usually makes the overall price paid relatively higher than would be the case if the goods were obtained on cash terms.
- The seller can repose the goods if the incase of default in payment of installment by the buyer.
- The buyer can only possess the commodity but not own it therefore ‟the buyer cannot sell the goods to another person before all installments are paid. Ownership of the goods remains with the seller. The goods are “on hire‟ to the buyer.
- After completing the payment (after the last installment has been made), a certificate is issued to the buyer as proof of transfer of ownership
- In case the buyer fails to make payment/defaults in payment; the seller can repossess the goods. However, if the buyer has paid two-thirds of the total/hire purchase price at the time of default, the seller has no legal right to repossess the goods.
- The seller can only recover the remaining amount of money through court action.
The seller must display both the cash price and the hire-purchase price on the items to enable the buyers to decide under what terms they want to buy the goods.
A written agreement has to be entered into by both the seller and the buyer. The agreement safeguards the intervals of all of them
Examples of hire purchase businesses operating in Kenya include; Sun king solar products company, Mkopa solar, Dlight solar, Panda solar, Africa Retail Traders (ART), Kukopesha, Singer and Amedo among others.
For salaried people, the hire purchase has introduced a system where the installments are deducted directly from the buyer’s salary every month. This is called the check-off system. In this system, no deposits/down payments are required.
The buyer’s employer takes up the duty of remitting the deposits to the seller on a monthly basis
Advantages of Hire purchase
Hire purchase present advantage to buyers and sellers as follows
To the buyer;
- The buyer acquires possession and use of goods immediately after entering into the contract.
- Installments to be paid are pre-determined, so the buyer knows and is able to budget for this amount and how to make the payments.
- One can acquire expensive goods/items which are difficult to get on cash terms hence one is able to obtain items easily.
- Payment is spread over a long duration of time making it convenient/suits the buyer’s income hence those with low income can make small payments that suit their income level.
- Raises standards of living despite limited resources since one is able to obtain items and pay for them in instalments. a good example is sun king solar company which gives solar products to residents of rural areas and this has improved the living standards of communities in rural areas.
To the seller;
- The goods belong to the seller until the last installment is paid hence he /she still can exercise control over the goods.
- He/she can repossess the goods in case the buyer defaults in payments.
- The seller is able to make more profit due to higher prices in the long run.
- The sales volume increases due to greater ability by customers to pay/more buyers are attracted to hire purchase terms leading to more sales.
- No refund is payable to a buyer for goods repossessed from him/her
- Due to the check-off system, chances of non-payment are minimized for salaried hire purchase buyers.
Disadvantages of Hire purchase
Hire purchase presents the following disadvantages to both the buyer and seller.
To the buyer
- The hire purchase price is higher than the cash price hence the buyer hence up paying more.
- The goods belong to the seller until the last installment is made hence the buyer has no control over the item taken under the hirer purchase system.
- Because of the easy payment terms, the buyer may be tempted to overspend which might lead to financial problems.
- The variety of goods sold on hire purchase terms is limited to those goods that are durable thus limiting access to perishable goods.
- If the buyer defaults in payment, the already paid ones are treated as hire charges and are not refunded thus a loss to the buyer.
- Goods may be repossessed if the buyer defaults in payment.
To the seller
- Goods repossessed can only be sold as secondhand due to the aspect of differed payment.
- There is a lot of documentation and filing of information/records which make hirer purchase tiresome and expensive.
- The cost of operating the business is usually very high due to the risk of failure of payment by the buyer.
- The risks of loss on hire purchase sales are normally high as some buyers may default in payment
- A high amount of capital is needed to finance a hire purchase business which not all entrepreneurs may not afford
- A lot of money is spent on the repair of damaged goods resulting in extra cost which reduce profits
- A lot of capital is tied and held in stock and debts which may present to the business owner a financial risk