The basic elements in a hire purchase agreement

signing-agreementYou will probably come across many jargons/terms in a hire purchase agreement. Below, we provide a list of commonly seen terms/elements in a hire purchase agreement.

  • Preparation. The basic documents you would need to prepare prior to entering into a hire purchase agreement include your latest income documents, your identification card, bank statements and the documents attached with the car (depending whether it’s a used or new car).
  • The Agreement. A hire purchase agreement should be in writing and comply with the requirements set out in the Hire Purchase Act. Otherwise, this agreement would be declared void.
  • Guarantor. As a backup to your application, the bank may request that you nominate a guarantor. A guarantor is a person who will be liable for your hire purchase agreement in the event you fail to keep your commitment.
  • Deposit. Typically, a deposit of 10% of the total cash value of your vehicle is required upfront. Bear in mind that some banks may require a higher percentage.
  • Margin of Finance. In a hire purchase arrangement, you can usually obtain up to a maximum financing of 90% (of your car value) from the bank.
  • Interest Rate. The interest rate on your hire purchase agreement varies depending on your negotiation with the bank. Typically, hire purchase interest rates can either be fixed (flat) or variable. Fixed or flat interest rates provide more certainty, however, the initial rate is usually higher than variable interest rates. On the other hand, variable interest rates can fluctuate depending on the bank’s base lending rate (BLR), and are usually calculated based on the outstanding balance owed on the hire purchase agreement.
  • Car Insurance. In Malaysia, you must ensure that your car is insured, and that your car insurance is updated/renewed yearly. This is normally a requirement in your hire purchase contract.
  • Payment. There will be a penalty fee for late payments on your hire purchase financing. In the event of failure to pay, your car may be repossessed by the bank.

The process of hire purchase

Your duties and obligations in a hire purchase agreement

Under a hire purchase agreement, your first and utmost responsibility would be to follow the agreement you settled for. Things to note down:

  • Pay the installments along with the agreed interest to your financier regularly and on time.
  • Possession is not ownership, so remember not to dispose or sell any part of the vehicle until you have fully paid off what is owing on your hire purchase agreement.
  • Keep a copy of the agreement, receipts and relating documents safely.

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