Definition of Hire purchase
A hire purchase arrangement is a good source of finance. By the operation of the purchase agreement, an initial down-payment is made in respect of the asset, and with the payment of regular instalments on both capital and interest, ownership of the goods is acquired at the end of the final payment. In some cases, an `option to purchase’ fee may be paid before ownership to the assets is finally acquired.
The hire purchase company remains the legal owner of the goods before the final option is exercised. Any violation of the hire purchase covenants could lead to forfeiture of the purchaser’s interest in the goods.
Under instalment credit, ownership of the goods is obtained from the onset subject to the purchaser meeting the regular instalment payment. For this arrangement, the lender’s security is the written promise to pay the agreed instalments, for which, preferably, a banker’s standing order is instituted.
Advantages of Hire purchase
The advantages of these sources of finance include the
- 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
In view of the risk element involved,
- basis lending criteria, designed to assess borrower’s credit worthiness and ability to pay, are usually applied.
Development of 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. The only surviving ones are the NAL securities that is involved in equipment leasing and Bentworth finance company[BFN] that specializes in the provision of installment credit finance. A third one, as recently advertised, is the first international finance company which claims to provide durable consumer goods financing including car loan refinancing for corporate clients, commercial and agricultural tractors and equipment financing, industrial equipment financing and leasing.
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. The suspicion of banks no doubt is dying slowly, especially with the introduction of merchant banking and rural branching of commercial banks ,but the extent to which the banks are suspect can be seen from the outcome of a study conducted by the university of Ife industrial research unit as shown below .it involves the sources of initial business finance for nearly 14,000 small scale industrial units surveyed.