Hire purchase agreements
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.
Hire purchase agreements usually last between 2 and 5 years, the most common last 3 years. Under a hire purchase agreement, the consumer does not actually own the goods until the last instalment is paid, although they have full use of the goods throughout the repayment period.
Hire purchase agreements can be held with banks, building societies, finance companies and certain retail stores, for example, garages. The store or garage is not actually providing the loan. It is acting as an agent for a finance company and earns commission from the finance company for arranging the loan.
It is advisable to read a hire purchase contract very carefully before committing yourself to any agreement.
How does a hire purchase agreement work?
A hire purchase agreement is drawn up and signed by the hirer (the consumer) and on behalf of the owner (the lending institution). If there is a retailer involved, for example, a garage, it also signs the agreement and supplies the goods in question.
Most of the car loans offered by garages are hire purchase loans. Consumers can also be offered hire purchase loans when buying furniture, computer equipment or electrical goods.
The hire purchase agreement states:
- The goods the agreement refers to, for example, a car or computer.
- The cash price of the goods
- The hire purchase price, which is the total sum payable over the life of the loan in order to complete the purchase of the goods. The hire purchase price is therefore the monthly payment or installment multiplied by the number of installments which have to be made.
- The amount of each instalment by which the hire purchase price is to be paid. Sometimes the last instalment required to end the agreement is much larger than all the others. This is called a balloon payment and will have to be paid to clear the loan and allow the consumer to become the owner. Read more about balloon payments on the Competition and Consumer Protection Commission's website.
- The date each instalment is to be paid
- The number of instalments
- The names and addresses of all the parties to the agreement
- A statement that the hirer has the right to withdraw from the agreement within 10 days of receiving a copy of the agreement. This is known as a cooling off period. Often consumers are asked to give away this right by signing a waiver. You do not have to sign this waiver in order for your application to be processed. Consumers should try to take some time to read all the terms of the agreement and to ensure they understand these fully before signing this or any other part of the agreement.
- A statement that the hirer (consumer) must inform the owner (finance house) as to the whereabouts of the goods to which the agreement relates
- The words "Hire Purchase Agreement" must be stated clearly and in a prominent position on the agreement form.
- The agreement must also set out the fees and penalties that apply. Some examples of these costs are provided below.
Unless all of these requirements are contained in the agreement, the agreement itself may not be enforceable.
Typical fees and costs on a hire purchase agreement
The fees and charges on hire purchase agreements vary, but may include:
- Documentation fees
- Interest surcharge for missed repayments - this means an additional amount of interest will be charged on the amount unpaid
- Penalty fees for missed or late payments
- Completion fee for ownership of the goods to pass to you
- Repossession charge - if the goods are repossessed, you will be charged around €300
- Rescheduling charge - if your lender agrees to change the loan terms
Any balloon payment charged on a hire purchase loan - while it is not an extra charge - has the effect of postponing part of the costs until after the loan. This means that in the earlier months and years, consumers are paying less off their loan that they would for a bank or a credit union loan.
Can a consumer terminate a hire purchase agreement?
A consumer (the hirer) can terminate the agreement at any time by giving notice in writing to the owner of the goods (the finance house). Consumers should be aware that breaking a hire purchase contract before its normal end date usually involves penalties. You can either:
- Return the goods to the owner and pay half the amount of the total hire purchase price (if the total of instalments already paid have not reached that amount) – this is called the half-rule. You do not have to pay half the hire purchase price immediately. A recent High Court decision clarified this. If you have not paid half the hire purchase price you can still return the goods. However, you will still owe the difference between the payments you have made and half the hire purchase price. Read more about the half-rule on the Competition and Consumer Protection Commission’s website. If the goods in question are damaged in any way, the consumer will be liable to pay for any damage caused. The finance house may issue a notice of costs, but consumers should try to get their own estimate in such cases.
- Buy the goods earlier than planned. The consumer can own the goods by paying the difference between the amount already paid and the total hire purchase price. In such cases, there is usually a reduction on the overall amount due as the loan is being paid off earlier than planned. This reduction is calculated using a recognised formula for early loan repayments, however, the amount of any reduction is relatively small.
Further information is available at the Competition and Consumer Protection Commission's website.
Can the owner (finance house) repossess the goods?
The finance house can only repossess the goods under certain circumstances. If the consumer has not yet paid off one-third of the total hire purchase cost, the owner can repossess the goods at any time without taking legal action against the consumer.
However, if the consumer has paid one-third or more off the total hire purchase cost, the owner cannot repossess the goods without taking legal proceedings. Any deposit that is paid at the start of the agreement or the value of any trade-in for example, is taken into account in calculating one third of the cost.
If this one-third rule is breached by the owner, the consumer is entitled to end the agreement and can seek a refund of all payments made. You can read more about the one-third rule on the Competition and Consumer Protection Commission’s website.
What happens if the goods are faulty or damaged?
Anything you buy under a hire purchase agreement must comply with the Sale of Goods and Supply of Services Act 1980 and be:
- Of merchantable quality
- Fit for its normal purpose, and reasonably durable
- As described, whether the description is part of the advertising or wrapping, on a label or something said by the salesperson.
If goods hired under a hire purchase agreement are or become faulty, both the retailer and the owner (finance company) are responsible. A consumer can claim against either party in this situation. A claim cannot be made against the manufacturer of the goods.
If a consumer returns defective goods, they are entitled to a refund of any installments paid as consumer rights in this situation are the same as if the goods were purchased outright.
A guarantee under a hire purchase agreement applies in the same way as if goods were bought outright. The manufacturer makes the guarantee. If there is a fault with the goods, the consumer can choose to have the goods repaired under the guarantee or to seek a full refund or exchange from the owner.
Under a hire purchase plan the consumer has a duty to take reasonable care of the hired goods. If the goods are damaged by the consumer and returned to the owner or finance company they are entitled to send a bill for repairs to the consumer.
Hire purchase costs
The cost of a hire purchase agreement is the difference between the cash price of the goods being hired and the full hire purchase price. If the cash price of a car is €12,000 and the hire purchase price is €17,000, then the hire purchase cost is €5,000, that is, the extra cost involved to hire the car for a period of time (and perhaps eventually to own it) rather than to buy it outright for cash.
Different lending institutions have different hire purchase costs. Some will quote an APR (Annual Percentage Rate). This can help consumers to compare hire purchase costs. It may be misleading to compare a hire purchase APR with that of a normal bank or credit union loan, as a consumer is paying for the hire of the goods and does not own them until the last installment of the agreement has been paid.
Consumers who would like independent information or help in understanding any of the terms and conditions of their hire purchase (or any other loan) contract are encouraged to contact the Competition and Consumer Protection Commission - see 'Where to apply' below. Apart from information and support, the Agency will help to ensure that any complaints are properly handled by the finance companies they regulate.
You can contact their consumer help-line on lo-call 1890 432 432 or visit their website.
How to apply
For specific consumer complaints against a finance company in relation to a hire purchase agreement, consumers should address their complaint in the first instance to the finance company. If they are not satisfied with the outcome, a formal complaint can be made to the Financial Services and Pensions Ombudsman. The Ombudsman has the power to award compensation to the consumer in cases where their rights have been breached, or where there is evidence of unfair treatment.
A consumer is not obliged to accept the solution recommended by the Ombudsman. Anyone who remains dissatisfied after pursuing these complaint procedures is entitled to seek redress by taking legal action against the finance company.
Where to apply