Hire Purchase 101

Essentially, a hire purchase (HP) is an installment plan which allows you to own that expensive something that you have always wanted. It is usually taken out as a contractual agreement between an individual and a lender (banks) so that a person can possess and have control of an asset over a term. To make it simpler, it's like a rent-to-own scheme.

The hire purchase financing option was developed by the Brits in the later half of the 19th century to help people with cash shortages to make expensive purchases like a kitchen stove, car or piano.

In its modern-day application, HPs are more commonly used as a form of car loan. In Malaysia, HP is the most used method to purchase cars. The agreement usually lasts between 3-9 years where at the end of it, the borrower will finally get to own the vehicle. 

Unfortunately, during these long years, the individual doesn't actually own the vehicle, they are merely renting the car from the owner, which in this case is the bank. Although the borrower has to insure, pay road tax or be liable for anything that happens to the vehicle, the legal owner of the vehicle is still the bank.

If all installments are paid throughout the term, and no discrepancies are found, then the car will legally be the owners at the end of the agreed upon number of years.

A few factors determine the amount you pay for each installment. A more extended contract over a longer period of years means smaller monthly payments, but the total amount you pay will be higher due to that niggling thing called interest. You could also lower the sum of each installment by putting down a larger downpayment. Some banks offer more competitive interest rates than others, so it is wise to shop around for which banks offer the least amount of interest. The interest rates also vary differently between new, recon and used cars. There are also some schemes that help young first-time buyers, so do your research.

In short, understand the terms and conditions of your HPs, make a commitment and stick to it. You know yourself best, so if you are undisciplined kind when it comes to finances then maybe HPs are not for you. The choice is yours and yours only, but do shop around for the best terms and interests.

Pros

• Effortless to arrange
• Fixed monthly payments
• Fixed interest rates
• Long term lengths up to 108 months
• The vehicle belongs to you after final payment
• No annual mileage restrictions like some leasing options
• Discount for early settlement
• Helps bump up your credit rating if you complete the HP agreement
• You don't have to part with a large amount of cash in one go

Cons

• The vehicle is at risk of repossession if monthly payments are not made
• Compound interest if agreed upon monthly repayment is not fulfilled
• You do not own the vehicle until your final payment
• Hire Purchase is expensive if you plan on taking more than a five-year tenure
• Finance is subject to status and not guaranteed (based on credit rating)

More pros than cons then, but again we reiterate do your research, both on the Hire Purchase and yourself.