Hire purchase companies in Nigeria provide durable consumer goods financing including car loan refinancing for corporate clients, commercial and agricultural tractors and equipment financing, industrial equipment financing and leasing.
What is a Hire purchase
Hire purchase is acquisition of assets on credit on credit and settlement of which is made through regular installments payments. its the provision of finance for assets or equipment which is repaid by instalments over a period of time in accordance with the contractual agreement which is entered into from the out-set. Unlike leasing, hire purchase is not a contract of bailment because by reason of the option to purchase, element of sale is evident in hire purchase which is very unlikely in leasing. Furthermore, the basic difference between hire purchase and leasing is whether or not the lessee shall become the owner of the leased equipment, the lessee rarely becomes such owner in practice. Hire purchase may be arranged in two ways. These are as follows:
- The exporter can either approach a hire purchase company in his country who would in turn contact its overseas correspondent office, branch or centre in the importer’s country to arrange the facilities for the buyer- the importer; or
- He arranges the finance in the importer’s country through a member. Normally, this union will have members in various countries and also a pre-determined agreements on how business can be introduced and transacted among members.
The process is that the hire purchase company, normally a finance house, will pay the exporter immediately. Thereafter, the buyer makes a deposit through the branch/centre of the finance house which is also a member of the international credit union. The balance is payable by equal installments as may be agreed from the out-set.
Advantages of Hire purchase
- Assets which could not be acquired outrightly may be obtained on hire purchase now and payment made for them over a period of time. This avoids a strain on the cash resources of the business concern
- There is no recouse to the exporter even if the importer defaults in repayment. This is an advantage to the exporter
- The importer is afforded the opportunity of receiving credit from a local finance house in form of instalment payments over a an agreed period of time.
- It enables a company to obtain the benefit of the 100% first year capital allowance since, unlike leasing, capital allowances are given to the hirer
- flexibility of repayment often planned to suit the company’s cash flow programme,
- the absence of legal fees and the widespread availability of the facilities.
Disadvantages of Hire purchase
- The disadvantage of hire purchase to the importer is that the cost of the finance i.e. interest rate is likely to be higher than other forms of short or medium term finance like overdraft or loan if one can be arranged
- There may be restrictions on repayment i.e. credit control in the importer’s country making it mandatory to make a huge amount of money as deposit and also compelling him to make repayment of the balance over a very short and restricted period of time
- Unlike the situation in leasing, the hirer must make an initial deposit out of capital which may be very limited.
- basis lending criteria, designed to assess borrower’s credit worthiness and ability to pay, are usually applied.
Hire purchase in Nigeria
Other than merely existing on paper, no official action seems to exist outside of the hire purchase act of 1965 and the hire purchase amendment act 1970. The latter seeks to regulate the agreement between the hire purchase company and the motor vehicle purchases. between 1960 and 1965, there were a number of hire purchase companies that specialized in financing consumer goods purchases. However, because of high rate of default, most of the higher purchase company folded up.
Besides the ones mentioned above, there exists a number of motor vehicle dealers particularly wholesale dealers that engage in hire purchase financing to their retailers and individual purchasers. The perpetuation of the informal sector continues in this day and age for a number of reasons. The banking system discriminates against the small rural saver or borrower. The banking system is itself suspect in a predominantly illitrate and rural setting. Getting to a bank is one thing; it is another thing to transact business of either opening an account, savings or current; or borrowing money with tears.