Hire-purchase: a few remarks

We are in favour of stimulating home-ownership through hire-purchase instead of mortgage loans. Simply states hire-purchase is a mixture of renting and buying.

If Alice owns a certain good, such as a house, which Bobs wants he could either sell or rent it from her. In case Bob buys Alice’s house, then he becomes its owner. Usually Bob will not have enough money pay the price in one time, so he has to loan the money.

Alternatively he could rent rather than buy Alice’s house. In this case she will remain the owner of the building, while he obtains the right to use it. Once Bob wants to leave he simply end its rental contract and returns his keys to Alice. And in certain circumstances Alice may end the contract as well, for instance if Bob does not pay the rent.

However, if Alice and Bob agree to a hire-purchase of her house, then the following is the case. Suppose the both agree on a price of 75,000 talents and that Bob will pay Alice 500 talents a month [this will take 12.5 years to pay off the total 75,000]. As long as Bob has not pay the entire 75,000, Alice will remain the legal owner. Ownership is only transferred [1] once the total price has been paid.

The fact that Alice remains the owner has several consequences. If Bob fails to fulfill his duties, such as failure to pay the monthly installments, the house acts as a security. That means that Alice can reclaim the house and dissolve the contract, though Bob might be entitled to some compensation. For Bob, however, is rest-debt will no more than the non-paid rent.

Example: Suppose that Bob has paid for 36 months his rent, than defaults on this duty for the next 6 months after which Alice ends the contract. In this case Bob’s outstanding debt would be 3,000 talents, but if he had a bank loan he would have a rest debt [after closure] of 57,000 talents. For Alice the benefit is that she can seek another hire-purchaser and has earned 18,000 talents.

Another consequence of Alice remaining the owner is that she could sell her property to a third party. It is clear that Bob is in need of some legal protection here, otherwise no one would dare to hire-purchase a house. Alice should be entitled sell the house hire-purchased by Bob, to Carol, provided that this sale does not affect the terms of the contract with Bob. In this case the only thing which would change for Bob is that now he has to pay Carol instead of Alice.

The possibility for home-owners to sell the hire-purchase contracts to third parties could be advantageous. In above example it will take Alice 12.5 years to get her 75,000, if she could her house to, for instance, a bank or a governmental institution, she will be able to receive [a large part of] this sum earlier.

Further the hire-purchaser should be protected by law against inappropriate dissolution of the contract by the hire-seller. We propose that only structural default by the purchaser should be reason the end the contract by the seller.

[1] Home ownership will be registered in a national register. Transfer of ownership means in this context that the data in this register will be updated.

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