With a hire purchase deal we can take home a product and use it while we’re paying it off. Hire purchase can seem like an easy way to pay when we haven't got the money up front – especially if it’s interest-free for a while. But it pays to find out the true cost of an HP deal before signing up.
Generally the things people buy on hire purchase, store credit or finance deals – such as appliances – are ‘value losers’. Once we’ve bought them their value goes down.
So it’s a good idea to take a moment and ask: Could I hold off on buying this, put money aside each month and avoid going into debt?
There are different options for buying an item on credit. Sometimes hire purchase or store credit isn’t the best option. Banks, credit unions, building societies and peer-to-peer lenders all offer personal loans. We can check what the total cost will be before signing any credit sale or hire purchase agreements.
Homeowners may be tempted to add to the mortgage. But if we don’t quickly repay the extra money borrowed this could end up being an even more expensive option than HP. A home is not really a source of cash, and when our property values rise, until we sell up, we’re really only increasing how much we can borrow.
Interest rates vary greatly. Personal loans and credit cards charge around 12–20% interest. Store cards from national chain stores charge interest as high as 25% a year.
Hire purchase and credit sale agreements range from 17–27%. Interest.co.nz has some of the latest rates.
With that sort of extra cost it pays to look around for the best deal. A $2,000 purchase over three years could cost between $2,570 and $2,940 – and that’s before other fees are included.
Adding it to a mortgage still means paying about $2,220, even if it’s repaid at 7% over three years, and the temptation is always to pay it off over a longer term, adding more to the overall cost.
Interest-free periods are great – we just need to repay the total cost of the purchase within that time. Otherwise, these deals can turn out to be very expensive.
Most hire purchase or credit sales agreements have a range of charges and fees. They might be bundled into the debt we have with the retailer, in which case we may not notice them. We could be paying $100 or more in establishment and account fees, even on an interest-free deal.
The retailer may insist on repayment insurance as part of the deal. This generally means that if the borrower dies, the insurer pays the lender the full amount owing. These policies also cover loss of income, such as through accident, illness or redundancy, so repayments are made for a period of time specified in the policy.
Paying the premium will add even more to the amount we owe on hire purchase and it may be an unnecessary cost. For example, someone not in paid work won’t need cover for redundancy.
The Consumer Protection website has information to help decide what insurance we need when buying on credit.
Hire purchase and credit sales agreements can be a good option if we treat them with care.