Hire purchase is a way of buying goods that allows you to pay for goods in instalments over a period of time. It goes by different names including instalment plans with the key elements being paying via small instalments more often than not with high-interest rates and/or late penalties levied if payment is late. It is commonly used to purchase expensive consumer goods and the item purchased on credit does not fully transfer to the buyer until all the payments are made. Here are the pros and cons of paying in instalment plans.
Pros of paying in instalments
Beneficial for low-wage earners and the cash-strapped
It gives low-income earners and cash-strapped people an opportunity to buy costly things that they can’t afford at once, allowing them to spread the payment over a period of time. For this reason, it gives people an opportunity to afford items that would otherwise be outside their reach, no matter how necessary or important such items may be.
Lightens the burden
Paying in instalments saves buyers from feeling the heavy burden of high-cost goods. The ability to spread the cost over time makes the purchases lighten the burden of what would otherwise be stressful purchases.
High-quality essential items
The ability to spread the payments makes it easier for buyers to purchase better-quality items that are generally more expensive. This means low-wage earners and the cash-strapped are not sentenced to purchasing cheaper, low-quality items. This is especially beneficial when it comes to essential items that are expensive.
Immediate use of the product
In the case of higher purchases, the buyer gets immediate access to and use of the good. This means the buyer can begin to benefit from using the item immediately after the down-payment or first instalment is paid.
Compared to other methods of financing, higher purchase and paying in instalments options are simple and typically relatively easy to obtain.
Fixed interest and easy to budget
Typically, the interest is fixed so you know exactly how much you need to pay each month. This makes it convenient and easier to fit your payments into your monthly budget.
You can reduce how much you pay
When paying in instalments, one of the factors that determines how much you pay in total is how much you pay per month. Fortunately, there are ways to reduce your overall payment by paying in lumpsum or paying larger instalments in order to shorten the payment period and how much you end up paying overall.
Paying in instalments options come in real handy when one has an emergency and needs to purchase an expensive product. It is especially beneficial when you have no spare funds and are in a tight spot.
Cons of paying in instalments options
Usually more expensive
Because most paying in instalments options charge interest over the entire payment period, you are likely to end up paying more overall. This is especially unfair for low-wage earners and cash-strapped people who end up essentially being punished for not having all the cash up-front. Ironically, the people with money are the ones who catch a break, while the ones experiencing tough times are given no break and in fact, required to pay more.
You don’t own it
The product does not become yours until you finish making the payments in full. For this reason, the item can be repossessed if the buyer is unable to keep making the payments even if it’s just the final instalment. This means the buyer loses whatever money they have paid thus far and the company just takes the item resells it and gets their money back.
Fewer discounts available
Compared to paying full-price up-front, there are fewer discounts available for paying in instalments options.
The small spread-out payments can have the negative effect of tempting people to purchase expensive essential or non-essential things that they do not need or cannot afford on their incomes. The small payments are deceptive making it appear affordable and like a smart financial choice when it may really not be, certainly not in the long run.
Long payment periods
Depending on the cost of the item, paying in instalments can take quite a long time. This is not only boring but can also be disheartening.
Paying in instalments is an easy financing option. It makes it possible for cash-strapped people or low-wage earners to afford products that would otherwise be outside their reach. It however can be deceptive with the small monthly payments making it easier to be tempted to purchase items you cannot afford.