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Buying a property, vehicle or costly assets with hire purchase has become a popular way for individuals and businesses in Nigeria. Whether you’re a driver trying to get your first car or a business owner looking to expand, understanding how hire purchase works and weighing its pros and cons is essential before signing any agreement.
In this blog post, we’ll discuss what hire purchase is, the advantages and disadvantages of hire purchase, which will help you decide if it’s the right financial option for you.
What is Hire Purchase?
Hire purchase is a type of installment payment plan where a buyer gets an asset first and agrees to pay in parts over a period of time. The buyer pays an initial deposit (or down payment) and continues to pay monthly installments. The buyers only obtain full ownership of the asset after the final payment is made. Hire purchase is commonly used to finance assets like Vehicles, industrial equipment, and sometimes even home appliances.
Advantages of Hire Purchase
1. Easy accessibility
Hire purchase is very much accessible to anyone. Individuals and businesses, especially startups and SMEs, can now acquire high-value assets like machinery, vehicles, etc through hire purchase. This means businesses/ individuals can get assets to generate revenue, even as they’re still in the process of purchasing them. Goodnews right?
2. Monthly payment
With hire purchase, asset can be easily paid for in monthly instalment over a period of time. You do not need to wait till you have the complete money before your you can purchase an asset. And by monthly steady payment, individuals and companies are able to better manage their cash flow, ensuring they aren’t depleting their reserves on a single high-value purchase.
3. Ownership
The buyer I entitle to ownership of the asset after full payment but before that the owner retains ownership of the asset. The asset is initially hired, and ownership only passes to the buyer once the full agreed-upon payments have been completed.
4. Immediate Use of the asset
Even though you haven’t paid in full, you get to use the item right away. Whether it’s a car or equipment, this allows you to start using the item for personal or business needs while paying gradually.
5. Ease of payment
As the payment has to be made in installments; it automatically turns out to be a boon for the buyer, as it does not upset his routine living nor his current cash flow. This is the biggest advantage for the people having a limited income.
6. Less risk
It is less risky for the seller too as he has the right to take back the property if the buyer fails to pay the installment or can’t meet up with the minimum percentage. It is also a low risk investment as the buyer will have to sign a hire purchase agreement This helps to protect each person’s right.
Business Growth Opportunities
For small business owners and entrepreneurs, hire purchase makes it easier to expand operations. You can get tools, machines, or vehicles you need to grow your business and pay over time from the revenue you generate.
Disadvantages of Hire Purchase
1. Higher cost and interest rate
The total amount paid over the period of a hire purchase agreement is usually higher than the item’s original cash price. This is because of the added interest and service charges. For example, a car worth ₦7 million might end up costing ₦8.4 million by the time all payments are completed. Thus, a buyer ends up paying the amount more than the actual one of the Asset or Property.
2. Restricted Ownership of asset
The buyer does not fully own the item until all payments are made. This means the seller/owner still has legal control over the asset and can reclaim it if you default on payments. Even after a fair amount of payment is made; the asset is still not his property till full payment with interest is made.
3. Risk of Repossession
If buyer is unable to meet your monthly payment or a certain percentage, the seller may repossess the item without needing to go to court. This can lead to loss of both the asset and the money already paid.
4. Depreciation Risk
For the seller it is a risk under such a system. Though he has the right to take that the Asset or Property from the hiree, the second-hand goods fetches lesser price than the actual cost. Again, if repossessed, it may come with defects needing repairs. The buyer also faces risk too. If he is buying a car or machinery, the item might lose value quickly, but he is still bound to pay the agreed price. He might end up paying more than the item is worth over time.
5. Longer payment period
The payments are usually extended over a longer period which will be tiresome and frustrating, keeping you under stress. He may to suspend other project just to focus on this which may reduce his portfolio.
6. Limited Flexibility
Hire purchase agreement is very difficult to change. Once a hire purchase agreement is entered, it’s hard to change the payment plan, return the item, or cancel the deal without facing financial consequences.