Hire-Purchase and Rental Goods

A hire-purchase (H-P) activity is a transaction that involves regular fees for the access to an entity, coupled with an option to buy provided that all conditions agreed in the contract are fulfilled at the end of the predetermined period. As such, H-P can be considered a type of installment credit. It allows the consumer to gain immediate possession of a property without obtaining the legal ownership of the physical entity over an agreed period of time. Through offering direct access to the property, H-P fosters customers' “buy now, pay later” attitude and encourages a culture of borrowing, thereby strongly contributing to an expansion of the consumer credit market.

H-P is a purchase of rights, not of a property. According to property rights theory, the ownership of a physical entity (property) consists of a bundle of property rights: the right to exclude third parties from the use of the property, the right to retain the profits yielded from the use of the property, the right to change the good, and the right to sell the property or to convey some of the rights to others. In contrast to ownership, which includes all four property rights, H-P allows the debtor to obtain only the two former, while the two remaining rights rest with the creditor. The legal ownership of the property vests with the lender until the final installment payment is made. As it is initially agreed on, with completion of the final payment, the lessee can either exercise the option to purchase the physical entity at a predetermined price or return it to the lender. In case of default on payment, the lender is able to repossess the property. The lessee is bound to reimburse the lender for any deficiency from the sale if it is repossessed.

Mostly, rental goods are the foundation of H-P transactions. Generally, a rental good can be described as a physical entity. For example, vehicles, machinery, technology, clothing, and handbags all represent rental goods. Theoretically, with H-P, the resale value of the rental good ought never to fall below the sum of all installment payments, as in case of default of payment, the lender may repossess the [Page 719]rental good, which needs to retain sufficient value for reselling purposes. Therefore, those rental goods subject to H-P contracts need to be sufficiently durable in order to ensure that they can be sold secondhand.

H-P agreements can be concluded between wholesalers and retailers or retailers and customers. Initially, the purchaser and the seller signed the contract. Only at the beginning of 1900 did finance corporations start to involve themselves in H-P transactions. Today, typically a finance company or commercial bank enters the contract. The vendor assigns his interest in the agreement with the customer to the finance company, which purchases the rental good from the retailer and then hires it to the consumer. Thus, the finance company acts as intermediary between the buyer and the seller.

H-P was introduced in the second half of the nineteenth century by Singer to promote the sale of sewing machines among the working class in Britain. With the cheapening of the motorcar before World War I, the rate of increase in H-P contracts accelerated markedly. Between 1920 and 1939, the further expansion in installment credit was mainly attributed to the growing use of H-P as a means for financing automobiles, furniture, audio equipment, household commodities, and pianos by middle- and working-class customers and for financing of machinery by producers. H-P agreements remained unregulated in Britain until 1938, when the Hire Purchase Act was passed providing a legislative definition of the rights of the customer in order to mitigate the abuses perpetrated by many vendors. The Depression led to a sharp decline in H-P transactions. During the first years of World War II, H-P activities recovered, and by 1941, they reached their peak. After the war, the demand for durables surged and, as a result, the uptake of H-P credits again gathered pace until 1960, when other forms of consumer credits started to play a bigger role.

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