What is hire purchase?

Also called closed-end leasing, this options lets you operate a car by paying equal instalments (as decided by you and the seller earlier), with an option of returning the car to the seller or buying the car at a prefixed sum, called the residual amount (which is usually very nominal). This will allow you to own a car without paying the full value of the car and not worry about re-selling the car if you do not want to own it after your deal with the seller ends.

This is a beneficial system for both the seller and a customer like you. You will be able to own a vehicle which is beyond your purchasing capacity, change cars more often, and not be worried about reselling the car. Most hire purchase deals are sold according to the usage of the usage, how long the user may want it and how much the driver would drive in a year. You wouldn’t have to pay the taxes of owning the car as the car would legally be owned by the seller, saving some money there. You also have the right to cancel this agreement any time if you want to, by paying the seller for breaking the contract.

The seller who provides this option is guaranteed more customers, some of whom may be recurring. The seller is also the legal owner of the car till a customer has paid all the dues including the residual amount, and has the option of taking the car back if the customer defaults on the instalments.

Car companies like BMW and Mercedes offer cars on hire purchase in India. BMW also has a plan called an Operating Lease where, for a higher instalment, regular car maintenance is taken care of by the company.

Here’s the disclaimer

If all of that sounds like an advertisement, it is because how companies term these offers. You never know how many kilometres you might have to drive during the agreement period. If you drive more than the stipulated driving limit, you’ll have to pay an extra which is calculated on the extra which could be quite hefty. Also, you cannot be sure that you will be able to return the car in the pristine conditions that the company wants the car back in at the end of the agreement term, the repair charges could be really high. If you decide to buy the car, the ‘balloon’ residual amount turns out to be very high (because you paid the ‘low’ monthly EMIs). And if you close the deal and return the car, the money returned to you turns out to be lower than the residual amount you would have to pay to buy the car.

The advice: Use this method to get a car because you heart tells you want a better car. You head wouldn’t allow you to spend the extras that you will certainly have to shell out.