Hire purchase

Hire purchase and credit sale agreements can seem like a great way to pay when you haven't got the money right now. Particularly if the retailer offers an interest free period.

But like any debt agreement, it pays to get sorted on HP before you sign up.

• Know your options
• Find the best interest rate
• Check the fees and charges
• Follow our 8 rules of HP

Know your options

If you're sure you want to buy an item on credit, sometimes borrowing through hire purchase or credit sales agreements isn't the best option. Banks, credit unions, building societies and finance companies all offer personal loans and you should check out the total cost of what they offer before signing a credit sale or hire purchase agreement.

Could you delay your purchase, save your monthly payments and avoid going into debt altogether?

If you are a homeowner, you may save on interest by adding the amount you need to borrow to your mortgage instead of entering into an HP agreement. But if you don't repay the extra money you borrowed quickly (by making additional repayments on your mortgage) you can end up paying interest on it for the whole term of your mortgage - which could be 25 years.

Take a look at all your options and think before you go into debt and be sure you calculate the full costs of borrowing before you sign any agreements.

Find the best interest rate

Interest rates vary greatly. Personal loans and credit cards hover around 13-20% interest. Store cards from national chain stores charge interest as high as 22.95% per annum. Hire purchase and credit sale agreements range from 17-23.9%. With that sort of additional cost it pays to make sure you look around for the best deal.

At those rates, a $2,000 purchase over three years could cost as little as $2,350 or as much as $2,730. And that's before other fees are allowed for. Adding it to your mortgage still means paying about $2,220 in all, if repaid at 9% interest over the same three year period.

(Examples calculated using today's dollars with monthly repayments.)

Interest free periods are good but try to repay the total cost of your purchase in that time or shortly into the interest period. If you can't make the total repayments relatively quickly, these deals can turn out to be a lot more expensive than you thought.

Check the fees and charges

Most hire purchase or credit sales agreements require you to pay charges and fees. You may not notice you are paying these fees as they may be added to the debt you have with the retailer.

Establishment and account fees, which cover the administrative costs of setting up your account, checking your credit record and sending out regular bills, can amount to $70 or more for a twelve month deal.

The retailer may insist you pay a repayment insurance premium. This insurance means your debt will be paid even if you can't make the payments and the cost can be very high.

8 rules of HP

Hire purchase and credit sales agreements can be a good option if you treat them with care.

1. Always ask the retailer to tell you all the fees and charges you must pay (set up costs, insurance, total interest over the full repayment period) as if you were paying them all today. You should also get a single, total dollar amount of what you will pay.
2. If the deal offers 0% interest, ask what the interest rate will be on balances left at the end of the interest free period.
3. By law you must be given a disclosure statement detailing all the terms of the credit deal before you sign or within five working days of signing. Ask for a copy of this statement and read it carefully before you agree to any deal.
4. Compare the charges and fees with the price of what you are buying. It may be that the charges amount to more than the interest you would pay on a different sort of loan or your credit card.
5. Work out the total interest you will pay on your purchase with the hire purchase calculator.
6. Only commit to a 0% interest hire purchase or credit sales agreement if you are sure you can repay most, if not all, of the debt in the interest free period. That way you will avoid high interest rates on unpaid balances.
7. Avoid taking on several hire purchase or finance deals at once. It can be difficult to keep track of when each deal has to be paid off and it can be hard to find the money to service many debts running at the same time. If you don't clear the loan in the interest free period you will be hit with high interest rates.
8. Take your time to decide. While, by law, you have three working days after you receive a disclosure statement to change your mind and withdraw from the hire purchase or finance deal, you will still have to find a way to pay for the purchases you made. Check out your rights as a borrower with Consumer.