Read this, before you sign that Hire Purchase Contract!!

Oluwole is a printer. He runs a small scale printing operation from his office in Bariga which produces business cards, greeting cards, customised stationery, and numerous other printing material. Oluwole’s outfit serves on average, 300 customers and the quality of his products has led to an increase in the number of his clientele, placing substantial pressure on his existing printing machinery.

Oluwole is in need of new machinery, which will improve his productivity and boost his profits.  the machine he needs costs N2,000,000 (Two Million Naira) which is far above his reach. He has approached his bank for a loan, but they require that he produces some collateral before he obtains a loan.

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However, they referred him to a Shylock Capital finance company which helps people buy machinery on a hire purchase basis.After an initial pre-qualification meeting with Shylock capital, a staff of the company calls him to explain  the basics of a Hire Purchase transaction. He explains that Hire purchase is an agreement whereby a person hires goods for a period of time by paying instalments, and can own the goods at the end of the agreement if all instalments are paid as and when due.

Under a hire purchase agreement, the customer does not actually own the goods until the last instalment is paid, although they have full use of the goods throughout the repayment period. Once all repayments have been made, the customer pays a final fee – referred to as the ‘option to purchase’ fee – to own the car outright. The staff member points Oluwole to a pictorial illustration of the  hire purchase transaction structure.

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Oluwole likes what he is hearing; he can obtain the machinery  he desires without having to pay the full cost of the equipment upfront. He knows that if the N2,000,000 is spread across a 60 month (5-year) period he can make up the N33,333 instalments and still have  enough left over to run the business and turn a profit.

The Company gives Oluwole a contract and tells him to review the contract and return the signed copy to them. Oluwole takes the contract to his Lawyers and asks them to interpret the contract for his benefit. His lawyers explain the following to him:

  • The customer didn’t have any right to redeem the hired goods if he did not complete the payment of his instalments. This even applies if he had paid all previous instalments punctually and he was a day late in paying the last instalment.
  • With hire purchase the customer usually (but not always) will have to put down a deposit of 10% of the value of the car. The customer then pay the rest of the value of the car in instalments, over a period of one to five years.The customer is in effect hiring the car until the customer makes their final payment, after which they  own it
  • The debt is secured against the car. So if they cannot pay it, the finance company could repossess the car to help pay off the debt. When the owner seizes the goods and he decides to sell to another party, he is not accountable to the customer, even if there was just one instalment to be paid.
  • The Customer has no right to sell the goods until all the instalments and the option fees have been paid. If the customer purports to sell the goods, they shall not be able to transfer good title to any subsequent purchaser, except in certain situations where the goods are sold to a subsequent purchaser for value without notice of the defect in title.
  • The interest rate charged by the finance company will be higher than the rates charged by a bank for a personal loan. Furthermore, in the event of an increase in the market rate by the central bank of Nigeria, the rate of interest charged on the asset will also increase, leading to a higher cost of acquisition of the asset.

Hire Purchase transactions are helpful in financing the purchase of assets, however before committing to a hire purchase transaction, it is essential that the Customer considers all the pros and cons outlined above in order to make the best decision in the circumstances.

We may be contacted via email or by telephone on +2348036258312 or  +2348028507718 for advice on hire purchase and other financing transactions.

 

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