The Consumer Council in Fiji is launching a financial literacy effort to help educate consumers about hire purchase agreements. For those that might not know, a hire purchase (HP) agreement is used to to purchase goods using installment credit.
In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner.
Others may be more familiar with the term rent to own.
In a national survey in Fiji, 46 percent of respondents said they had purchased goods using HP. Of those, 29 percent said they had made multiple HP arrangements. The incidence of hire purchase agreements is large. – Source
The concern is that consumers do not understand how hire purchase agreements actually work and the financial pitfalls of making such purchases.
According to a report by the Consumer Council of Fiji:
“41% of the population claim that they are loyal HP consumers. Of those relying on HP, 79% understand that HP is a loan that they take from the seller to purchase the items. A fifth, on the other hand, think that the HP system is a system of delayed payments for the items bought, without any additional charge on the cash price of the item.
Of those who purchased goods on HP, 36% stated that for their last purchase, the supplier did not advise them of the interest and principal components of the purchase. As a part of the HP requirements, sellers are required to provide documentation on the various charges and fees for the items. These are given as part of the contract between the seller and the buyer.
However, not all buyers are financially literate. As such, an explanation in their preferred language would have a lasting impact on their minds on the key financial commitments that they are making under the contract. There currently is no requirement that each HP customer receive an explanation in a language of their choice of the financial terms and conditions of the HP agreement.
53% of the HP customers asked the seller to advise them of the total interest payments on the purchase. Most were shown the contract between the seller and the buyer. The contract does not have any statement or explanation on the way the interest rates are calculated.
Financial literacy empowers a party to assess the options available to each. One option that consumers of HP have is paying off their loans earlier than the due date. To exercise this option they would need to know the financial advantages that they would get out of early payments. Actual responses from consumers show that 71% of the consumers do not get shown any calculations on rebates for early payments. Of the 29% who were shown some calculations or any formula on the calculation of the rebates, a quarter could not understand the calculations.
HP companies also levy a ‘documentation fee’ on every HP activity. The legislation is silent on the types of fees which credit providers can levy, and their quantums.
44% of the consumers in Fiji do not know that there is a documentation fee that is included in the calculations for the HP credit terms. Further, of the 56% who are aware of this fee, only 58% learnt of this before they bought the items on HP; 42% learnt of this fee either after they had agreed to buy the item or after repayments had started.”
It’s Time for Fiji to Take Action
It’s time for Fiji to take positive action to not outlaw HP arrangements but make them much more transparent so consumers know what they are purchasing and what the total cost is.
Apparent disclosures of such information help both merchants and consumers in the long run. Merchants will receive greater protection against criticisms they have hidden or duped consumers in transactions. Consumers will get more information about the true cost of the transaction so they can make a more fully informed decision about the purchase.