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When you need essential items for the home or garden, but you do not have the disposable income to cover the cost, hire purchase can be a potential option but there are drawbacks to this style of borrowing. Of course, it is not without its upsides, too, but before you decide to engage with this type of retailer, it is important to understand both sides of the argument. In this article, we explain the basics of hire purchase and also some of the positive and negative points so that you can make an informed decision.
This term is rarely used these days, but it essentially relates to anything you buy by paying in instalments, much like you would with a personal loan or salary loan. In the Philippines, hire purchase style stores are commonplace, as they are in the rest of the developed world. Essentially, a customer agrees to pay a little more for their products in return for being able to take the item away that day without having to pay the full price immediately. This is similar to car finance in that you can still use the product, but you are expected to keep up regular monthly payments until the full amount has been paid off.
In today’s world, money is scarce for a lot of people, especially those who have fallen victim to the Covid 19 outbreak. Hire purchase allows you to pick up a brand-new TV, a state-of-the-art speaker system or a super powerful gaming laptop, even if you cannot quite afford the full amount straight away. Providing that you do not have too much existing debt and retailer is happy to extend some credit to you, most people are approved for this kind of financial transaction. Unlike traditional shops, some hire purchase style stores will allow you to take away an item with just a small deposit. This is usually representative of a percentage of the item’s value.
Hire purchase essentially means that you do not fully own the product until you have paid off the full amount. This means that you are essentially leasing it from the retailer until you have paid your last instalment. Though it only happens rarely, products can be repossessed if you fail to make payments on them and if they are considered to be of significantly lesser value due to things like damage or poor maintenance, the retailer is likely to ask for some form of compensation. This means that many people are more likely to take greater care of their products after buying them on hire purchase. In the Philippines, retailers will only allow those with relatively good credit ratings to use this service at a reasonable rate of interest, so it makes sense to check this before you apply.
This is not necessarily a bad thing if you are able to budget for the amount you are required to pay to the retailer each month, but many people can find this kind of debt quite restrictive. If you prefer to make large purchases using money you already have, the hire purchase option probably is not for you. Having to come up with a payment as regularly as you would do for a personal loan can be stressful, especially for those on a low income, so we would not recommend this for anybody without regular employment.
How much you will pay for a product on hire purchase depends on your credit rating, employment history and other factors the retailer will decide. For those with a good score and a regular income, hire purchase can work out relatively inexpensive but for those with less than perfect spending histories, the cost can be more than double what you would ordinarily pay. In some cases, firms will charge extremely high interest rates, not too dissimilar to those charged by salary loan providers. Generally speaking, this kind of agreement should be avoided at all costs, unless you are certain that you can pay off what you have borrowed comfortably and without causing problems with your everyday cash flow.
This is probably the biggest downside of hire purchase agreements. Generally speaking, the same kind of principals apply to personal loans or salary loans, meaning that the better your credit history and employment situation is, the more likely you are to be offered a good rate of interest. Low interest hire purchase is fairly commonplace for things like vehicles but can be harder to find when it comes to things like electronics or other household items. Some stores will offer 0% finance to valued customers and those with exceptional credit but in the majority of cases, interest rates will be as high or indeed, significantly higher than what you would expect to pay on a standard credit card.
Hire purchase can be a good option for those who need a specific immediately but cannot afford to pay the full amount all at once. Though this is definitely true for people with relatively stable credit scores, anybody who is in financial difficulty or who has had previous problems with debt could find that this type of agreement makes things a lot worse. Though you are able to secure the products you want quickly, in many cases you can end up paying more than double or even triple what the item is actually worth. As with personal loans or salary loans, we would advise you to proceed with caution and only agree to terms that genuinely suit your financial situation. Be realistic about the amount you can afford to pay off each month and only agree to interest rates that you feel comfortable with.