Hire purchase is an arrangement for buying things that are expensive for you, where the buyer makes an initial down payment and pays the balance plus interest in installments. The term hire purchase is commonly used in the United Kingdom and it’s more commonly known as an installment plan in the United States and other countries. However, there can be a difference between the two: With some installment plans, the buyer gets the ownership rights as soon as the contract is signed with the seller. With hire purchase agreements, the buyer gets the item after the first deposit but the ownership of the item is not officially transferred to the buyer until all the payments have been made.
How Does Hire Purchase Work In Ghana?
Let’s say you need a safa or piece of furniture for your new office or need a door for your home you are trying to complete but you do not have the funds to pay outright for it. In a case like this, you need to find a company or business that offers hire purchases.
So the cost of the item is 2000GHs but what you have on you is 500GHs. The company will spread the cost of the item over a period of time for you to pay. The period for you to pay varies depending on the cost and the company.
Cost of item = 2000GHs
Amount to Deposit: 500GHs
Balance After Deposit: 1500GHs
The company now spread the balance being 1500GHs over a period of two, three, or four months for you to finish the payment.
Advantages of Hire Purchase
Hire purchase finance is designed to help businesses find new ways to grow, expand and operate efficiently, by providing them with the means to buy new equipment without having to wave goodbye to a lump sum of cash.
Kind to your cashflow
Anyone who has spent a lot of time focused on maintaining a healthy cashflow will know that suddenly having to fork out big chunks of money can cause a host of problems down the line.
With hire purchase finance, you’ll pay a set amount each month, over a period of time that works for you and your budget, which should make your financial forecasting much simpler.
Access high-spec Assets
When paying out of your own pocket, you’ll be limited by how much you can afford to (and are willing to) spend.
Choosing hire purchase finance has the advantage of making it realistic to afford higher spec tools and equipment, which could make work easier, give you a competitive edge and have more financial benefits in the long run.
Lower interest than other funding options
One concern some companies have when they look into funding is how interest rates will affect them. With hire purchase agreements, interest is fixed for the duration of the repayment term, and often works out lower than options such as an overdraft or bank loan.
Own the asset after the last installment
One advantage of hire purchase over lease-based asset options is that after the last installment, you own the equipment. This can make hire purchase more attractive depending on what the equipment is, how it will be used in your organisation and how quickly it will depreciate.
Disadvantages of Hire Purchase
Finding the right funding to buy equipment is all about reviewing all the options, as every business case is unique.
Committing to ongoing fixed payments
While spreading the cost of an expensive asset is in most situations a benefit, you have to be willing to commit to the payments for the duration of the term.
Higher cost overall
One disadvantage that many people associate with financing solutions such as hire purchase is that overall you will end up paying a higher fee for the same item.
Asset depreciation
In some circumstances, the asset you have bought may have depreciated to such a degree that by the time of the final payment, when it officially becomes yours, it is worth next to nothing and may need to be replaced.