Hire Purchase and Credit Sale: Key Differences

There are two prevalent methods of acquiring goods and services on credit: Hire Purchase and Credit Sale. These financial agreements offer individuals and businesses the flexibility they need to obtain essential assets such as vehicles, equipment, or electronics without making an upfront payment.

Hire Purchase and Credit Sale: In a commercial transaction, Hire Purchase and Credit Sale are synonymous but not conterminous, that is to say that these two terms are very similar to each other. However, they cannot be used in place of one another. The similarities which exist between a Hire Purchase and Credit Sale transaction makes it important for us to distinguish in this Article these two terms and enumerate the differences which exist between them.

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Meaning of Hire Purchase

A Hire purchase is a type of Credit sale whereby the Owner contracts to hire or bail out goods to the hirer, and whereby the hirer contracts to pay the price of the goods so contracted, with an option of buying such goods.

Furthermore, a Hire Purchase may be referred to as an agreement where you hire goods and then pay the agreed amount by installment. In a hire purchase, while still making payments, you are not allowed to sell or dispose the goods without the Hirer’s permission, and after making payment you may decide to take full possession of the good in question.

A Hire purchase has the following Legal Implications:

1. It is a conditional sale

2. There is an option by either of the parties to the agreement to terminate the Contract at will

3. The Owner reserves the Right to repossess the goods upon the default of hirer; and

4. It is a Credit Sale.

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Meaning of Credit Sale

A Credit Sale is a form of Sale transaction whereby the buyer agrees to buy the goods from the seller with a condition that he advances payment until he satisfies the full payment for the goods. For example, where I (Tochukwu) wants to buy a Car, but I have insufficient funds to purchase my desired car immediately, I may enter into an agreement to make an initial deposit, and keep paying for the car subsequently (e.g. each month) until I satisfy the full payment of the car. Such an agreement is a Credit sale agreement.

Where I default with my financial obligation of making installment payment monthly for the car, the seller may sue me and recover the balance of payment for the car.

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Difference Between a Hire Purchase and Credit Sale

As stated earlier in this Article, a Hire Purchase is a form of Credit sale. Hence, it is very similar to a Credit sale. This similarity which exists between them makes it difficult to distinguish in theory these two terms. However, there exist a clear line of differences between a Hire Purchase and a Credit Sale. These differences include:

a. In a Credit sale, the purchaser has no option of terminating the contract and returning the goods. Whereas in a Hire Purchase agreement, the Hirer may at will terminate the Contract and return the goods (chattel).

b. In a Credit sale, the ownership of the goods transfers to the buyer, whereas in a Hire Purchase agreement, the ownership of the goods remain with the seller until the full payment has been made by the Hirer.

c. In a Hire Purchase agreement, where there is default of payment by the hirer, the owner may take repossession of the goods. Whereas in a Credit sale, where there is default by the buyer to meet up with his or her financial obligation, the only option open to the seller is to institute an action to recover the balance of the payment owed by the buyer/ purchaser.

d. A Hire Purchase agreement is an agreement of bailment whereas a Credit sale is merely an agreement to sell.

e. The parties in a Hire purchase and Credit sale differ. For instance, in a Hire Purchase agreement, there is a Dealer (seller), Hirer (purchaser), and a Finance company (owner). While in a Credit sale, there is a Seller, buyer, and Credit facility.

f. A Hire purchase agreement only involves specific transactions and goods such as Consumer goods and Motor Vehicle agreements. Credit Sale on the other hand is applicable to a wide variety of goods, including but not limited to goods primarily purchased, goods used for personal, domestic or other household purposes.

g. In a Credit sale, the seller is permitted to use one Credit sale agreement for the purchase of more than one goods in the same transaction, but in a Hire Purchase agreement, there must be a separate Hire Purchase agreement with respect to every good purchased.

h. In a Credit sale, a guarantor is not usually required. However, in a Hire Purchase, the Finance Company usually require a hirer to provide a guarantor who will guarantee the performance of the Hirer’s obligations under the Hire Purchase agreement.

i. The requirements as to the form of agreement of a Credit Sale and a Hire Purchase agreement differ respectively as provided in their Governing law: the Consumer Protection (Credit sale) Regulations 2012, and the Hire Purchase Act, 1967 respectively.

Conclusively, in addition to this plethora of differences which exist between a Hire Purchase agreement and a Credit sale as stated above, two English cases are further instructive in distinguishing between these two terms (Hire Purchase) and a (Credit Sale).

In Lee v Butler (1893) 2 Q.B. 318, X agreed to let a certain furniture on hire to Y. Y agreed to pay by way of rent the sum of £1 immediately, and £96 some three months later. The agreement stipulated that the property in the Furniture should pass to Y when the total of £97 was paid, but that if Y defaulted in payment or removed the goods from her home address, X could recover possession of the furniture without notice. Before the Second installment was paid, Y sold and delivered the Furniture to the Defendant who received it in good faith and without notice of X’s rights. X sued the defendant to recover the goods.

The Court of Appeal held that since the property in the furniture would automatically have passed to Y, if she has paid the full price of the Furniture, Y who agreed to buy the goods, could under Section 25(2) Sale of Goods Act (Factors Act) validly pass property in the furniture to the Defendant.

Subsequently, in the case of Helby v Matthews (1895 -9) ALL E.R. 821, the Appellant agreed to let a piano on hire to Y at a rent of 10s: 6s per month, the agreement permitted Y to return the Piano to the Appellant at any time subject to payment of all installments due to the date of return. It also provided that if and when the installment paid by Y totaled 18s : 18s the piano will become his property, but until then the property remained in the Appellant, who was entitled to retake possession of the Piano if Y defaulted in part or failed to keep it at his own address. Y pledged the Piano with the Defendant, a Pawnbroker, as a Security for a loan, the Appellant sued the Defendant to recover the price.

The House of Lords distinguished this from the case of Lee v Butler, and held that since Y could return the Piano before the sum of 18;18s had been paid, he had not agreed to buy the goods, but had a mere option to buy. Thus, neither Section 9 of the Factors Act nor Section 25(2) Sale of Goods Act could come in play.

The divergent decisions of the Court in these two cases clearly highlights some of the differences between a Hire Purchase agreement and a Credit Sale transaction which I have considered earlier in this Article. I trust after painstakingly reading this Article, you will definitely understand and know the differences between a Hire Purchase and a Credit Sale.

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