Difference between Hire Purchase and Credit Sale Agreement

Difference between Hire Purchase and Credit Sale Agreement

When it comes to financing purchases, there are a few options available to consumers. Two popular options are hire purchase and credit sale agreements. While these two agreements may seem similar, they are actually quite different. In this article, we will explore the key differences between hire purchase and credit sale agreements.

Definition

Hire purchase is a type of agreement in which a buyer purchases an item on credit and makes regular instalments (usually monthly) until the full payment is made. The buyer does not own the item until the final payment is made. Ownership is transferred upon payment of the final instalment.

A credit sale agreement, on the other hand, is a contract between a seller and a buyer where the seller agrees to provide goods or services to the buyer on credit. The buyer takes immediate possession of the item and ownership is transferred to the buyer upon delivery of the goods or services. The buyer is obligated to make regular payments until the full payment is made.

Ownership

One of the key differences between hire purchase and credit sale agreements is ownership. In a hire purchase agreement, the buyer does not own the item until the final payment is made. This means that the buyer cannot sell or dispose of the item until they have paid off the full amount owed. In contrast, in a credit sale agreement, ownership is transferred to the buyer as soon as the goods or services are delivered, even if the buyer has not made the full payment.

Interest rates

Another important difference between hire purchase and credit sale agreements is the interest rate charged. In a hire purchase agreement, the interest rate is often higher than that of a credit sale agreement. This is because the buyer does not own the item until the final payment is made, so the lender is taking on more risk. In contrast, in a credit sale agreement, the interest rate is often lower because the seller has the security of ownership of the goods or services.

Repossession

In a hire purchase agreement, if the buyer does not make the payments as agreed, the lender has the right to repossess the item. The buyer loses all the money they have paid up until that point. In contrast, in a credit sale agreement, the seller is not entitled to repossess the item if the buyer does not make the payments. The seller can only take legal action to recover the money owed.

Final thoughts

In conclusion, hire purchase and credit sale agreements may sound similar, but they are actually quite different. Hire purchase agreements are more restrictive, with ownership only transferred once the final payment is made, whereas credit sale agreements give the buyer immediate ownership of the goods or services. Interest rates are often higher in hire purchase agreements, and the lender has the right to repossess the item if the buyer defaults. It is important to fully understand the terms and conditions of each agreement to make an informed decision on which one is best for you.