Blogs
What's New Trending
-
- Blog, Hire purchase
- (0)
- 03 Mins
In making investment decision so many people are faced with deciding which financing option is best for them, to opt for Hire Purchase or Loan? The both may seem the same because you get what you need now and pay later. However, there are differences between hire purchase and loan. In this blog post we will be talking about the difference between hire purchase and loan and why what to consider before making your choice.
What is a Hire Purchase?
Hire purchase is a contract of purchase where a buyer gets an asset at pays in instalment over a period of time. The buyer obtains ownership only when the full amount of the contract has been paid to the financier/seller. However, the buyer/hirer can start using the asset immediately. In hire purchase, the buyer
What is a Loan?
A loan is when a bank or lender gives you money upfront, and you agree to pay it back over time with interest. A loan can be used when a buyer needs immediate ownership of the asset but pays the amount and interest over a period of time.
Hire purchase vs loan
Ownership
There is a difference in ownership of asset in hire purchase and loan. In hire purchase the hirer has no ownership of the asset until full payment is made whereas in loan, the buyer borrows money, pays for the asset, and owns it immediately.
Security
Hire purchase requires no collateral as the asset itself is the collateral but loan requires a collateral before it can be granted. The type of collateral to be used varies from institution and amount requested.
Cost
In the case of hire purchase the total amount paid by the hirer or buyer is the actual amount + interest. However, in loans the buyer gets the asset at the actual cost with no interest because he pays with the loan obtained.
Interest rate
Interest rate for hire purchase can be high, that of loan is usually lower if there is a good credit.
Repossession of asset
In the case of default from that the buyer is unable to pay all the payments required under the agreement. Once the buyer stops making the instalments, the seller/financier has the right to take away the asset. In the case of a loan the borrower can only take away the assets provided as security against the loan.
| Hire purchase | Loan |
| The seller/financier owns the asset until the buyer makes the final payment | The buyer borrows money, pays for the asset, and owns it immediately. |
| No collateral is required to get hire purchase | Collateral is usually required and it varies from institution |
| In a case where the hirer stops making instalment, the seller can take away the asset | Only asset provided as collateral to the loan can be take away |
| Hirer/buyer acquire asset at real cost + interest | Buyer acquire asset at real cost only |
| Can be higher than bank loans | Usually lower, especially with good credit |
Similarities between hire purchase and loan
- They’re both paid over a period of time
- Agreement is usually signed
- Guarantors are usually involved
- Both are paid in instalment
- Both involve a level of financial risk for the buyer or borrower, as they are responsible for making the payments.
- Both can be used to acquire asset
- Both requires down payment
Between hire purchase and loan: which is better
Well one cannot out rightly say hire purchase is better than loan and vice versa. It all depends on what you want as an individual. While hire purchase offers investment opportunities, a loan may not. You may opt for a loan option when you need money to get various items or you’re looking for more flexible use of funds.