Hire purchase is different to layby because you take the item right away and might pay interest.
A hire purchase is a consumer credit contract. A consumer credit contract is an agreement to borrow money or buy products on credit for your personal use, and the lender charges you interest and fees.
The lender may also take a security interest, which means they can take the product back if you don't make your payments. The lender must be a business that regularly provides credit, eg a finance company.
Your rights are protected by the Credit Contract and Consumer Finance Act. The lender must check the loan or credit meets your needs, and make sure you can afford repayments. For high-cost loans:
- Lenders cannot ask you to pay back more than twice the amount borrowed.
- They cannot charge compound interest.
- They cannot charge more than 0.8% of the unpaid loan balance in interest and fees per day when averaged across the loan term.
- Default fees for missed payments must be $30 or less.
For full details on your rights:
Credit contracts: Plain English definitions
Until you pay off the item, the lender is usually entitled to repossess it if you miss payments.
Getting approved for credit
Before finalising an agreement to buy on credit, the finance company must make sure:
- you can afford repayments
- buying on credit meets your requirements.
They might look at:
- your credit history
- your current ability to pay and income
- your age, eg if you're over 18
- if you owe money to other lenders, eg your bank.
Credit checks, scores and history
Sometimes insurance or an extended warranty is a condition of buying on credit, so long as these cover reasonable risks and don't double up on insurance you already have.
- payment protection insurance so payments can still be made if something happens, eg you lose your job
- gap insurance to pay the balance if the product is destroyed and your other insurance does not fully cover what you still owe.
Before you sign anything, the retailer or finance company must make sure the insurance meets your requirements and you will be able to make the insurance payments. They must also give you a copy of each policy before the insurance is arranged.