Two common methods of purchasing goods with instalments are conditional sale agreements and hire purchase agreements. If you’re unsure about the difference between these two, this article is here to clarify that for you.
What is a conditional sale agreement?
A conditional sale agreement is a credit agreement where you agree to buy goods over a period of time by making instalment payments. However, unlike a traditional loan, the ownership of the item doesn’t transfer to you until you’ve completed all the agreed payments.
This means that while you’re making payments, the seller or finance company still technically owns the goods.
Conditional sale agreements are often used for expensive items like cars or machinery. Once you make the final payment, ownership of the item transfers automatically to you without any extra steps involved.
There’s no need for a lump sum payment at the end to claim ownership, which can make this option appealing if you don’t want a balloon payment at the end of the agreement.
What is a hire purchase agreement?
A hire purchase agreement is another popular way to spread the cost of buying an item over time. Under this agreement, you also make regular payments for the goods you intend to purchase.
The key distinction here is that the ownership of the item does not automatically transfer to you at the end of the payment period. Instead, you have an option to buy the goods outright by paying an additional final fee, sometimes referred to as a “balloon payment.”
With a hire purchase agreement, you have the option to return the goods before the final payment if you decide you no longer want them, and you will not own the item until you’ve paid that final balloon payment.
This method is often used for car purchases, where you can spread the payments over several years and then decide at the end whether you want to keep the vehicle by making the final payment or return it.
Key differences between conditional sale and hire purchase agreements
Ownership of the goods
- Conditional sale: Ownership of the goods automatically transfers to you once the final instalment is made.
- Hire purchase: Ownership is not automatic. You must make a final balloon payment to take full ownership of the goods.
Flexibility
- Conditional sale: There is less flexibility with a conditional sale agreement since you’re committing to buying the item from the outset. Once you’ve made all payments, ownership transfers to you, and there’s no option to return the goods.
- Hire purchase: Hire purchase offers more flexibility. If you reach the end of your HP payments and decide you no longer want the item, you can return it without making the final balloon payment, which gives you an exit option.
Initial deposit
- Conditional sale: Some agreements may not require an initial deposit, depending on the terms, making it easier to access the goods right away.
- Hire purchase: Typically, hire purchase agreements require an initial deposit before the regular payments commence.
Cost implications
- Conditional sale: While you pay for the item over time, the total cost may be lower compared to hire purchase because there is no final balloon payment.
- Hire purchase: Hire purchase agreements often result in higher overall costs, particularly if you choose to make the balloon payment to own the item outright. However, the flexibility of being able to walk away without buying the item can offset this cost.
Legal treatment
- Conditional sale: Under a conditional sale agreement, you have equitable ownership rights, meaning that while you don’t technically own the item until the final payment, you do have an interest in it.
- Hire purchase: In a hire purchase agreement, the legal title remains with the seller or finance company until the final payment is made, and you do not have any ownership rights until that point.
Which agreement is right for you?
The decision between a conditional sale and hire purchase agreement depends on your circumstances and long-term goals. Here’s a breakdown to help you choose.
Opt for a conditional sale agreement if:
- You are certain that you want to own the item at the end of the payment period.
- You prefer the certainty of automatic ownership without the need for an extra payment.
- You don’t mind a lower level of flexibility and are confident about committing to buying the item.
Choose a hire purchase agreement if:
- You’re looking for more flexibility and aren’t entirely sure whether you want to own the item at the end.
- You’re comfortable with the idea of paying an initial deposit and a balloon payment for ownership.
- You value the ability to return the goods if you decide they’re not for you.
Important considerations before entering into an agreement
Before entering into either a conditional sale or hire purchase agreement, there are a few key factors to consider:
Your financial situation
Ensure that you are in a stable financial position to commit to making payments over time. Missing payments could result in losing the goods and possibly damaging your credit score.
Terms of the agreement
Always read the fine print and fully understand the terms of your agreement. Are there any penalties for missed payments? What happens if you wish to end the agreement early? Understanding these details can help you avoid surprises later on.
Additional costs
In a hire purchase agreement, the final balloon payment can sometimes be significant. Make sure you’re aware of this cost upfront to avoid being caught off guard when the time comes.
The item’s depreciation
If the item you’re buying is something that will depreciate quickly, such as a car, you may want to think twice about purchasing it through either agreement. While spreading payments can make it more affordable in the short term, you could end up paying more than the item is worth by the time you own it outright.
Conclusion
When it comes to choosing between a conditional sale and a hire purchase agreement, understanding the nuances can save you from future headaches.
A conditional sale might be better suited if you’re certain about ownership and don’t want to deal with a final payment, while a hire purchase gives you flexibility, albeit at a potentially higher cost.
Ultimately, the right choice depends on your financial situation, your long-term goals, and your preference for flexibility.
Whichever option you choose, make sure you read the terms carefully and fully understand the obligations involved to make a sound decision that aligns with your needs.
🚗 You might like this guide: What happens if there are outstanding payments at the end of my HP agreement?