Whether buying a new or used car, most people never have enough money to make cash purchase and they end up looking for some financing option. One such option is hire purchase and before deciding to use this option it would be prudent to understand what it entails.
With a hire purchase agreement, the buyer is required to make a deposit with the car dealer and to pay off the amounts outstanding over an agreed-upon period of time. The vehicle acts as the collateral for the outstanding amount and for this reason the buyer does not own the vehicle until all the payments have been made. As with other auto financing options, a buyer’s credit rating plays a crucial part in determining the interest rate that a car dealership will impose. People with good credit rating will naturally get better interest rates.
One of the advantages of using hire purchase arrangements to buy cars is that only a small deposit is required by car dealers. In most cases, the deposit does not exceed 10% therefore making it easy for people of little means to own cars. The interest rates charged vary but they are usually quite low especially for new cars.
In addition, auto hire purchase terms tend to be very flexible. Buyers can pay for cars for periods ranging from just a few months to several years depending on their abilities. With a hire purchase agreement the buyer knows the exact interest rate that is applicable for the entire period of the agreement thereby making it easy to plan ahead.
The biggest drawback of auto hire purchase is the fact that the buyer has no claim to the car until the last installment is paid. In a world of many uncertainties, this might work to the disadvantage of the buyer should something unexpected happen making it impossible for the monthly payments to be made. Repossessions are therefore quite common when cars are financed through hire purchase.
While hire purchase auto financing is a popular option, it should be approached with care especially by people with shaky sources of income. Should you be using your paycheck to make such payments, you stand to lose your car if you are declared redundant. Unexpected expenses such as those arising from illnesses and uninsured emergencies could have a similar effect.