NO matter how complex all commercial activities come down to the buying and selling of goods and services, people may not always have enough money on hand or have the full purchase price to buy things which they require and so they access credit facilities.
Rights: MIRIAM TOSE MAJOME
It is convenient and beneficial for both buyers and sellers to enter into credit facilities. Hire purchase contracts are one such type of facility offered by some retailers. Buyers gain through the flexibility and convenience of spreading payments over a period of time instead of paying all at once.
Sellers benefit from increased sales and profits as finance and premium interest charges boost the normal cash price. Hire purchase is a very convenient but more costly way of buying goods.
The law
The law governing hire purchase agreements that serves to protect both buyers and sellers is the Hire Purchase Act Chapter 14:09. It provides for the regulation of hire purchase agreements and instalment sales and all other related aspects.
Hire purchase agreements
Goods are sold subject to the condition that even if the goods are delivered, the ownership does not pass to the purchaser until the full purchase price has been paid. They still belong to the seller who is leasing them. This is the norm unless there is an agreement to the contrary, where ownership may pass before completion of payment.
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Payment of the full purchase price is spread over an agreed period with at least two instalments. The buyer ordinarily takes delivery or physical possession of the goods and is authorised to use them while still paying for them. These agreements have traditionally enabled people who might otherwise not have afforded to buy goods up-front to acquire household property, clothes, cars and other equipment.
It is a fact that very few people can afford to pay cash up-front for goods and even they can it may not be financially prudent for various reasons.
Lay-by schemes are a unique and informal type of credit contract. Some shops allow customers to buy goods in instalments, but do not allow them to take the goods away before finishing paying for them.
Possession or delivery only occurs when the payment is complete. Purchasers may be entitled to clear payment and own the goods even before the agreed payment period. Notably, hire purchase agreements do not necessarily mean the lease will culminate in change of ownership. The lease agreement could be indefinite or could be terminated.
Financial lease agreements
These are often entered into by business concerns with commercial financiers like banks, accepting houses and discount houses. Businesses may require to purchase or lease capital equipment such as machinery or vehicles to use in their business operations.
They operate similar to hire purchase in that they have to make periodic instalments and the financier owns whatever equipment it is leasing until full payment is received.
Instalment sale agreements
They always have to be in writing and must be signed by both the seller and buyer and must state the full purchase price. If this is not done the agreement will be deemed as if the ownership passed to the purchaser with the first instalment and the seller will not be entitled to repossess the goods upon default.
The purchase price is paid in instalments spread over an agreed period which may be days, weeks, months or years.
The seller is entitled to reclaim the goods if the purchaser fails to comply with the terms of the instalment sale agreement.
If the buyer defaults and fails to pay the instalments as agreed, they will be in breach of the contract and can be sued for the owing amount and damages.
During the lease period, the goods are insured against outcomes such as fire or theft and the insurance charges are added to the purchase price.
The buyer also pays finance charges which include the costs of administering the agreement.
The most onerous charge is the interest charge. Interest charges are governed by legislation and in hire purchase agreements they are usually pegged at prevailing lending rates on the maximum allowable so they tend to be very high.
Default of payments attract even higher interest rates as punitive rates of interest are applied. This results in the final purchase price being very high compared to the cash purchase.
Need for caution
It is essential to thoroughly scrutinise hire purchase and instalments sale agreements before committing and signing. The final price after all charges have been factored will always be much higher than in a cash sale.
The convenience and flexibility of spreading payments is welcome but it comes at a cost.
The final price includes insurance, finance, administration and insurance charges. Sometimes it does not make economic or practical sense to buy items on hire purchase.
Some people rush to commit themselves without properly assessing the full implications and obligations placed by instalment sales.
In reality they are a millstone around the neck. Luxury household items like leather sofas, solid oak bedroom suites or Persian rugs are indeed attractive and tempting to buy in instalments because it appears doable. But in reality, it is never easy being tied down for two or three years paying expensive instalments in addition to the other existing bills one is already groaning under. Two or three years is a long time to be tied down to a debt. In these turbulent economic times and job insecurity scares, anything can happen that might impede the ability to keep up with instalments.
The seller is entitled to repossess the items even after many months of payment and sue for damages because of the breach of contract.
The insurance paid covers certain eventualities but unpaid instalments arising out of breach of contract is not one of them.
Incidence of breach of contracts and failure to pay instalments on time or at all is quite topical now and an increasing phenomenon.
It is a fact that the economy is distressed and people are losing jobs and losing their capacity to pay loans.
Some, who are still employed, are going for months without getting paid and are, thus, unable to keep up with hire purchase instalments.
Next week, we will discuss breaching hire purchase contracts and the implications.
