Hire purchase

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Hire purchase (HP) is an idiom and legal term for a form of purchase in which payment for goods is made in installments over a period of time and in which title to the goods supplied - in other words, ownership - does not pass to the purchaser until all such payments have been made. Retention of title to goods differentiates HP from other common consumer credit systems. The consumer hires the goods, pays regular periodic rent payments, and - depending upon the nature of the agreement - must or may purchase title to the goods with a final payment (or may elect at the end of the hire period to return the goods to the vendor without seeking a transfer of title).

HP was a common consumer credit system within living memory; it provided a straightforward instrument for vendors interested in selling to customers who lacked obvious collateral for credit; the object being traded became collateral for completion of the contract - payment of all the hire purchase instalments. HP allowed vendors to expand their markets while minimising their exposure to risk of default by retaining ownership of the asset until paid for. HP is perhaps less common, though by no means extinct, in a time when many more people have collateral such as mortgaged or wholly owned properties, and other forms of credit are readily available.

HP is advantageous to consumers in providing a means of purchasing relatively costly capital items over an extended time period; and to certain business consumers in that the balance sheet and taxation treatment of hire purchased goods differs from outright capital purchases.

Many countries allow hire purchase as a means of selling and buying goods, and national laws provide a framework for hire purchase to prevent a range of potential abuses. Some of the issues and considerations attendant on systems of hire purchase, and codified in laws, include

  • Rights & obligations on the vendor and purchaser, including such measures as cooling-off periods during which purchasers can back out of deals for a limited time period after signing a contract
  • For business, differential tax treatment depending upon whether or not the purchase option is taken up
  • Stipulations on remedy for default of payment or risk to the goods, relating especially to what may be repossessed by the vendor, under what circumstances, and with what authority
  • Stipulations relating to the rental interest charged within the HP deal, being the amount by which the HP cost exceeds an outright cash purchase. In general, firms offering HP arrangements must specify Annual Percentage Rates of interest to provide consumers with a measure of the cost of the hire element of the purchase.
  • Stipulations that despite the hire nature of the transaction, the purchase of goods is positively covered by other legislation relating to Sales of Goods, Unfair Contract Terms, &c.
  • Licensing of vendors able to offer hire purchase agreements

Hire purchase was colloquially referred to in the United Kingdom as the never never.

U.S. Terminology

It should be noted that in the United States, where the word hire refers to employment, the comparable system is called Closed-end leasing, also sometimes known as lease purchase, lease option, and rent-to-own.

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