- Hire purchase is a method of purchasing assets where the buyer pays for the asset in instalments over a set period of time.
- The buyer takes possession of the asset at the beginning of the contract but does not become the legal owner until the final payment is made.
- Hire purchase can be used as a source of finance for businesses who need to purchase assets but do not have the funds to do so upfront.
- In Zimbabwe an example of a company that does Hire Purchase is TV Sales
- Here are some key points to consider:
Features of hire purchase:
- The buyer takes possession of the asset at the beginning of the contract, but does not become the legal owner until the final payment is made.
- The asset acts as security for the finance, which means the lender can repossess the asset if the buyer fails to make the payments.
- The finance agreement will usually include an interest charge, which means the total cost of the asset will be higher than the purchase price.
- The buyer will usually need to pay a deposit upfront, which is usually a percentage of the purchase price.
- The length of the hire purchase agreement can vary, but is usually between 1-5 years.
Situations where hire purchase may be appropriate:
- Businesses that need to purchase assets, such as vehicles or equipment, but do not have the funds to do so upfront.
- Businesses that want to spread the cost of an asset over a period of time to improve cash flow.
- Businesses that want to preserve their existing lines of credit, such as bank loans or overdrafts, for other purposes.
Benefits of hire purchase:
- The business can acquire the asset immediately without needing to pay the full purchase price upfront.
- The cost of the asset can be spread over a period of time, which can help with cash flow management.
- The finance agreement is usually secured against the asset, which can make it easier to obtain than unsecured loans.
- The interest charge on the finance agreement is usually fixed, which means the business can budget for the repayments.
Drawbacks of hire purchase:
- The total cost of the asset will be higher than the purchase price due to the interest charge.
- The business will not become the legal owner of the asset until the final payment is made, which means they cannot sell the asset until then.
- If the business fails to make the repayments, the lender can repossess the asset, which could have a negative impact on the business operations.
