Hire Purchase

This Topic Includes:
Hire purchase laws
Who can get HP
Finance companies
What does HP cost
Shop around for credit
Hire purchase agreement
Insurance and hire purchase
Cancelling hire purchase
Faulty goods on hire purchase
Second-hand goods
Repaying early
Rebate calculations
Missing payments
Making a complaint

The information in this section may only apply to contracts or agreements entered into before 1 April 2005.  If you entered into a guarantor contract or agreement on or after 1 April 2005 see our Credit guide.

Hire purchase (HP) is a form of credit. It is a way to buy goods when you cannot afford to pay the full amount straight away. It is often used to buy household appliances, furniture and cars.

The money to pay for the goods is provided by the shop or by a finance company. You can take the goods home and pay for them over time but the finance company has a security interest in them until you have made the final payment. This is often called buying 'on tick', the 'drip-feed' or the 'never-never'.

Sometimes shops offer interest-free hire purchase where you pay only the cash price in instalments.

Laws applying to hire purchase

Hire purchase sales must comply with the Hire Purchase Act 1971. Where you are paying back more than the cash price of the goods (ie, interest and other charges), the sale must also comply with the Credit Contracts Act 1981. These Acts can be viewed online at the government legislation website.

Who can get hire purchase

Any person can choose to buy on hire purchase. But some retailers will not enter into a hire purchase deals where the buyer's credit history shows to the retailer that they are a poor credit risk. Buyers who present a risk to the finance company may require a co-borrower or a guarantor before credit approval is given. Younger borrowers (those over 16) may be asked to provide a guarantor either because they have no credit history or have only just started working - making it difficult for the retailer to assess the credit risk.

Retailers and finance companies must comply with the Human Rights Act. This means that they cannot deny credit only on the basis of gender, marital status, race, colour, religious or ethical belief, national or ethnic origins, disability, political opinion, employment status, family status, sexual orientation, or age. More information on the Human Rights Act is available from the Human Rights Commission.

Finance companies

Shops often have an arrangement with a finance company to provide the hire purchase finance. You make the payments to the finance company, not to the shop. The name of the finance company will be on the hire purchase agreement.

What does HP cost?

In most cases you pay more than the price on the price tag. Hire purchase includes interest and other administrative costs.

eg, a shop offers fridges for $800 cash or "credit over 24 months". You pay a deposit at the shop, sign and agreement and the fridge is delivered to your home. You pay the rest of the money in monthly instalments to a finance company named in the agreement. You pay back more than $1000 because interest and other costs are added to the cash price.

Shop around for credit

Compare the rates and other costs at several shops before you buy. Remember that the interest rate AND the other costs affect the total cost of hire purchase. Find out if a bank loan would be cheaper than hire purchase finance.

The HP agreement

When you buy goods on hire purchase, you and the seller sign a written agreement.

The agreement must tell you:

• what you are buying
• how many payments you will be making
• how often to pay (eg, weekly, monthly)
• the amount to pay
• when to pay
• where to pay
• the name and address of the seller.
• Amount financed (the amount of credit you are borrowing).

To get the amount financed the seller adds the following figures together:

• the cash price of the goods
• freight/delivery charges
• installation charges
• statutory fees (eg, cost of motor vehicle securities registration if buying a car on hire purchase)
• optional repayment insurance
• other charges (eg, the cost of extra accessories for the goods).

then deducts from that total:

• your deposit
• the value of any trade-in you offer.

Total cost of credit

This is determined by adding:

• interest (or 'Finance Charge') 
• booking fee
• maintenance and repairs
• insurance required by seller
• other charges (eg, a fee to check your credit rating).

This is the additional cost of the transaction over the cash transaction.

Adding the amount financed and total cost of credit together will give you the amount you have to pay back. This is called the Balance payable on the hire purchase agreement.

Finance rate

The finance rate is higher than the interest rate. It shows the true cost of using credit because it adds the interest and other costs together and shows them as a percentage (%) of the amount financed.

Advice to purchasers

The advice to purchasers is a statement that will appear on your hire purchase agreement stating your rights to:

• a rebate if you repay early
• cancel the contract for a short period of time after you have signed the agreement
• transfer ('assign') your rights and obligations to another person.

Other information in the hire purchase agreement

• what happens if you do not pay as agreed
• the right to repossess goods if you fail to make payments on time
• your obligation to keep the goods safe and in good order
• how to return the goods if you cannot pay.

This information may be in the fine print on the back of the agreement.

If any of this information is missing from your agreement you may not be liable for some of the cost of credit. The agreement cannot be enforced until the required information has been supplied.

Important notes about the agreement

You must be given a copy of the agreement within 10 days of the day following the date you signed the agreement.

If you do not get a signed copy of the agreement straight away you must be given a sales docket which gives the same details.

If you do not receive a copy of the agreement you may not have to pay the cost of credit.

The seller cannot change the agreement after you sign it without your agreement, except to enter details from a sales docket, or to correct clerical errors, eg, a spelling mistake.

Because you don't own the goods until they are paid for, you cannot sell them AND you cannot list them as security if you borrow money.

Insurance and hire purchase

Your agreement may show a charge for one or more kinds of insurance.

Insurance against theft, loss or damage

This insurance is not required by law but the seller can insist the goods are insured for theft, loss or damage.

If you have household insurance you may not wish to buy separate insurance for the goods. When you go shopping for goods on hire purchase, take proof of having up-to-date insurance.

If you have household insurance seek advice if the seller insists you have additional and separate insurance for the goods on hire purchase. This may be considered an 'oppressive' condition.

You may agree to separate insurance cover for the goods. The seller may then decide which company you must insure the goods with. The cost of insurance must be at reasonable market rates.

If you don't have insurance and the goods are stolen, lost or damaged, you will have to keep on paying for the goods.

Repayment or Consumer Protection Insurance

Consumer protection insurance (CPI) offers to make your payments for a set time if you lose your income through illness, accident or redundancy. This insurance is also called payment protection insurance or repayment insurance. This insurance is not required by law but some shops make it a requirement for taking out hire purchase with them.

Before you agree to CPI check:

• how much cover you will get
• a copy of the insurance policy. The coverage offered may not be worth the premium charged
• if it covers you when you are sacked from your job
• that the insurer is reputable and the rates are reasonable. Ring around and compare them.

If you are on a benefit you won't lose your income so you don't need this insurance.

Cancelling hire purchase

If you have taken the goods home you may cancel the credit part of the agreement. You must tell the seller within three working days that you want to cancel the credit AND you must pay the cash price of the goods within 15 working days of the date of cancellation. You must cancel the credit in writing.

If you have taken the goods home but not received a copy of the agreement you can cancel the credit at any time. This also applies if the agreement does not contain all the information it should. You then have 15 working days to pay the cash price of the goods. You can ask the shop to take the goods back but they don't have to agree.

If you have not taken the goods home you have three working days to cancel the credit AND the goods. The seller cannot keep your deposit. 'Working days' do not include Saturdays, Sundays, or national holidays.

If you have an interest-free deal with no cost of credit then you do not have a three day right to cancel unless the right is included in your agreement.

If you signed a hire purchase deal with a door to door seller you have extra cancellation rights. you have extra cancellation rights.

If the seller breaks the terms of the agreement you can cancel the agreement. For example, if the seller does not deliver the goods or agrees to insure the goods but does not do so.

Faulty goods on hire purchase

If goods are faulty, break down or are not what you ordered you have the rights under the Consumer Guarantees Act.

You can expect to be given correct information about the goods and the hire purchase agreement. The Fair Trading Act says the seller must not mislead you or give false information.

Note: When the goods are faulty DON'T stop payments on the hire purchase as the finance company won't be aware of any problems with the goods. If you fail to make payments on time the goods could be repossessed. Tell the finance company - they may let you put a stop on payments while you resolve the fault with the retailer.

Second-hand goods

Your hire purchase agreement may have a statement which says:

'I understand that the goods to which this agreement relates are second hand goods and that {name of seller} does not promise that they are fit for use or for any particular purpose. '

This statement is not allowed. If you are buying second hand goods you should cross it out. The seller is trying to 'contract out' of the Consumer Guarantees Act. Second-hand goods must be fit for their normal purpose, be free of faults and last a reasonable time.

Repaying early

If the cash price of the goods is under $15,000 you can pay the hire purchase off early at any time. You will be entitled to a rebate. This is a reduction in the amount that you have agreed to pay. There are rebates for the finance charges (interest and booking fees), insurance charges and maintenance service contracts. The Hire Purchase Act sets out a formula for rebates.

Rebate calculations

Follow the steps below to calculate your rebate, to see if it is worthwhile to re-pay your hp early.

You will need a calculator with a percentage key function to do this.

A) A rebate for some of the cost of credit or finance charges

Step 1:

Add all the finance charges such as interest, booking fees, and administration charges. This is the amount shown on the agreement as the total cost of credit.

eg, your hire purchase agreement is for 12 months. After 8 months you decide to pay the agreement off. Add all the finance charges on the agreement.

Step 2:

Use the Rebate Table for Finance Charges to find out the percentage rebate.

A 12 month agreement paid off after 8 months still has 4 months left to run. The percentage rebate is 11.54%.

The calculation is made on the full months left to run. If you are already into the next payment period when you pay the agreement off do not count the month you are in.

Step 3:

Multiply the total finance charges by the percentage rebate to work out the finance charge rebate.

$202.30 x 11.54% = $23.35

This means that the amount you owe under the agreement will be reduced by $23.33 when you make the final payment.

B) Unused portion of any insurance premiums

No complicated formula is required here. You should receive a refund of

all the premiums paid in advance for any full year, and

any rebate the insurer may offer for the remainder of current year.

eg, you paid $186 for insurance to cover a 24 month agreement. You are now paying off the HP in the eighth month. The insurer will give a rebate for the four months remaining on this year's premium plus a full rebate of premium for the second year.

Divide total premium by number of years the agreement runs for.

C) The unused portion of any repair or maintenance charges

Use the same calculation as for insurance rebate.

eg, you have paid $83 for maintenance on a 12 month agreement. There is 4 months on the agreement to go:

You should get a rebate of $27.67 for maintenance charges.

Rebate table for finance charges

Missing payments

If you can't keep up with your payments, tell the company providing the money.

They may help you arrange one of the options listed below. If you don't make your payments on time they can repossess the goods. 

You may have these options:

Spread the payments over a longer period

You will pay more interest but the monthly payments will be less. This change to the agreement must be in writing.

Ask someone else to take over the hire purchase and the goods

This arrangement is called assignment. You must write to the finance company asking them to transfer the agreement to the other person. The finance company should agree provided the person can meet the payments. You will both have to sign papers. But, the finance company may still keep your name on the agreement as a guarantor for the person you introduced to them.

Ask the finance company to agree to take the goods and cancel the agreement

There may even be a term in the agreement which allows you to return the goods. This is called 'voluntary return' or 'voluntary repossession'. Check our repossession section to see what steps the finance company has to take after taking your goods back. This is not the same as cancelling the contract within 3 days of purchase. You will still be liable for any money owing after the goods you returned have been sold.

A Citizens Advice Bureau or Budget Advice Service can help you arrange one of these options. They may even be able to help you re-organise your budget so you can keep up the original payments.

Making a complaint

Make sure you have your copy of the agreement and any other papers about your hire purchase.

1. Is the complaint about the goods or about the finance arrangements?
   • If it is about the goods go back to the seller and ask for the problem to be put right. Tell the finance company there is a problem with the goods.
   • If the complaint is about the finance write or talk to the finance company and ask for the problem to be put right.
2. If this does not fix the problem ask for advice from your local Community Law Centre or Citizens Advice Bureau.
3. Once you know more about your rights write or talk to the seller or the finance company again and ask for the problem to be put right.
4. At this point if the problem has not been solved you may decide to take your complaint to the Disputes Tribunal. At the tribunal a referee will decide your case.

Note: at present the Tribunal can only hear claims under the Hire Purchase Act about the method of repossession or a variation of the contract. Or, in respect of faulty goods matters under the Consumer Guarantees Act.

A Disputes Tribunal Referee can 're-open' a hire purchase agreement to see if it is harsh or oppressive.

The Referee can look at:

• the terms of the agreement
• the way the finance company has used its powers under the agreement
• whether the consumer felt pressured to enter the agreement.

There are many remedies available through the Disputes Tribunal when a hire purchase agreement has been re-opened. Your local Community Law Centre or Citizens Advice Bureau can advise on which remedies are suitable in your cause.