A common way of borrowing is financing through a hire purchase. Hereby an agreement is always concluded between 3 parties: the financing institution, the supplier of the goods and yourself. The hire purchase financing is always linked to an object and is usually used for the purchase of products such as a car. This form of borrowing is also called a descending goods credit. Lease purchase mainly differs from other loans because you only become the owner of the product after the last installment.
Lease purchase can be seen as a special form of loan, whereby the sustainable product is used as collateral for the agreement. As the provider of the product remains the owner, he can assert his rights if the payment obligations are not met. The provider of the product may in that case demand a refund of the product.
With hire-purchase financing, the loan amount is repaid in monthly installments. These have been agreed in advance. The monthly amount to be paid is always made up of a repayment part and an interest part. Just as with a personal loan, the part that has already been repaid cannot be taken up again.
Transfer of ownership
The lease-purchase financing differs from lease because the transfer of ownership is legally valid at the end of the term and therefore not optional. Hire purchase differs from installment purchase because the transfer of ownership is only granted to the rental buyer at the end of the period. If you take out a lease-purchase financing you can opt for different loan periods. This duration can last 12 months, but also 72 months. The interest amount is set in advance and does not change during the term.
The flexibility of the hire-purchase financing consists of the fact that you can base the installment amount on part of the loan amount. This means that you still have an outstanding debt balance at the end of the agreed period. This amount is also called the final installment. It is possible to repay this amount in one go, but a new financing can also be arranged for the final installment. The advantage of the hire purchase is that the credit is cheaper, and that in the event of non-compliance with the lease purchase obligation, only the product stands surety and must be returned. There can be no seizure of income by the product or credit provider.
One of the disadvantages of hire-purchase is that the buyer will have to pay a high interest rate. Lease purchase is a form of loan that is often used to finance the purchase of a car, for example. If you are going to purchase a new car from the dealer on the basis of rental purchase, there will often be an obligation to take out all-risk car insurance. At the moment that the car is driven in total loss, you are still obliged to meet the repayment obligations of the lease-purchase agreement. If you are not all-risk insured, you and you no longer have a car and you have to pay for a long time for a car that you no longer have. It is therefore useful to first look at other types of loans that offer more benefits than buying on the basis of hire-purchase.