What is a 'Hire Purchase'
A hire purchase is a method of buying goods through making installment payments over time. The term "hire purchase" originated in the United Kingdom and is similar to rent-to-own arrangements in the United States. Under a hire purchase contract, the buyer is leasing the goods and does not obtain ownership until the full amount of the contract is paid.
BREAKING DOWN 'Hire Purchase'To begin a hire purchase, a payment is often required up front. The rest of the amount due is submitted through scheduled payments, similar to an installment loan or a vehicle lease. The ownership of the good purchased through a hire purchase is not officially transferred to the buyer until all required payments have been submitted. Companies offering hire purchase options earn a profit by applying additional costs to the monthly payment which serves as interest charges for the purchase.
Benefits of Using a Hire Purchase
Businesses commonly employ this manner of leasing goods to enhance the appearance of earnings metrics. For instance, by leasing assets, it may be possible to keep the debt used to pay for the assets and the asset itself off the balance sheet, resulting in higher operational and return-on-asset (ROA) figures.
In circumstances where a buyer either cannot continue to make the required payments or is no longer interested in purchasing the item, it can be returned to the company at which the hire purchase arrangement was made. This may render the original agreement void, as the associated asset has been returned to the store that currently maintains ownership rights on the asset in question.
Risks of Using a Hire Purchase
In the United States, consumer rent-to-own arrangements are controversial because they can be used in an attempt to circumvent proper accounting standards. This can include the lack of credit checks as well as payment amounts that result in higher-than-average amounts of interest effectively being paid.
There have been allegations that U.S. rent-to-own businesses bypass certain consumer protection laws by referring to the purchase contracts as rental agreements instead as an extension of credit. Rental agreements are exempt from the Truth in Lending Act that requires the clear disclosure of interest rates on consumer loan products. This allows rent-to-own businesses to refrain from explicitly stating the associated interest rate paid based on the product's price compared to the monthly payment amounts.
Additionally, if a buyer using a hire purchase fails to make the required payments, the company sponsoring the purchase can repossess the item. Whether a repossession is voluntary or involuntary, the buyer is generally not eligible to receive any funds back that have already been placed toward the purchase.