Why Hire Purchase Costs So Much
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"Motor Dealer" Gives His Views on What Hire Purchase Involves. A Reply to S. T. R.'s Recent Article on that
Subject
IVIANY motor dealers read the iVlarticle entitled "What is the Cost of Hire Purchase?" in The Commercial lioior dated June 9, and many niust have been refreshed by the naIvet6 of 5.T.R., in thinking that his article in any way helped to solve carriers' problems. I think that it rather underrated the intelligence of the carrier, for it is rare for a buyer to think that the charges are a percentage of the total price; also, 12i per cent, for an 18-months' term is above the standard rate.
If this be not an underrating of the buyer's business acumen, it might be taken as a reflection on the methods of the dealer, or, more properly perhaps, a reflection on the accuracy of the article. Whenever a commercial vehicle is sold through the motor trade, as most are, the dealer arranges any hire purchase that is wanted. He is a party to it, and sometimes a guarantor, so that his views as to what is involved, are important.
Standard Rates Are Fair.
The figures quoted in the article have already been criticized and corrected by the finance companies, but without this correction, any lasting impression on the reader would be that the "interest rates" were exorbitantly high and should be fought and reduced, if possible, to bank-rate levels, The dealer is the party who would have to resist such arguments from the buyer—arguments that would have only one end in view, and that the cutting of the hire-purchase companies' standard rates.
If hire purchase were the only part of a sale open to argument, the dealer, with the good case he has, would not demur, but with vehicle list-prices not protected, and usedvehicle values "iii the air," the article cannot, in my opinion, be considered helpful.
The theme of the article is that the purchaser is paying interest. This is not iio; the motor trade, as a whole and for years, has been rightly calling the item "charges." Because the charges are a percentage of the sum advanced, and the banks, when they advance money, make a percentage interest charge, it used to be a common error to confuse the terms. No useful purpose is really served by corerptithit theeactual per centage; that is not what hire pur chase realty involves. Let us see what it does involve.
It could, and should, have been pointed out that, to any commercialvehicle buyer, hire purchase is a facility in conection with the intelligent use of his capital resources and must be judged as such. An operator can have a bank overdraft, if he has security other than the vehicle he is buying, and, in addition, carry out his purchase through a finance company. Many do this.
What is involved, in such a hirepurchase transaction, is whether the money advanced, when used in his normal trading, will produce for him more profit than the charges made for its use.
Many manufacturers and merchants, iiid many shopkeepers reckon to turn over the capital they have available, in buying raw material, iii manufacturing or in distributing, so many times a year at a, certain percentage profit. It is the number of times they do this in the year that is important, and the purchase of a new vehicle or a fleet, for cash, earl make a big difference in the amount available for trading.
Value of the Finance Company.
On the other hand, by using hirepurchase facilities, quoting the example of the article, the use of £480 is retained at the cost of £00 (more accurately £55), and if this amount be "turned over," as it well might be, 12 times a year (once per month) at a profit of 10 per cent., then the vehicle is acquired with little or no disturbance to the volume of trade being done and no other party, at any rate of " ieterest," other than a finance company, will take the vehicle as security for such an advantageous advance.
The haulage contractor's financial considerations are just as good an instance if it be granted—as.-it must be in any financial argument such as this—that the question. ...of traffic licences is not a factor.
Take, as an example, a modern six-wheeler at a round-figure price of £1,000, capable of earning its owner £500 per year. An operator who has £1,000 can, obviously, buy one such vehicle for cash and make £500, but, better still, with the same £1,000, by using hire-purchase facilities, he could buy three or four such vehicles. Let us say he puts £800 out on three, keeping £200 reserve for initial operating costs. He then has a commitment of £2,200, for which he is charged 7i per cent., which is £165 for every year of the hiring period and, therefore, he makes a profit of £1,335—probably more, as there will be a saving on overheads—by using hire-purchase facilities as against a profit of only £500 by a cash trans action. That is more like what hire purchase really involves.
Hire Purchase Creates Buyers.
There are other buyers of commercial vehicles—not all used ones either—who could not buy at all if it were not for hire-purchase facili ties. Many dealers " guarantee " such cases, and for this risk, or in any case for their unremunerated work in passing on to buyers the finance companies' net rates, such dealers are now to face such statements from these customers that the charges are really 29 per cent, interest, or that they can properly be estimated at four times the amount of their nominal percentage.
Be clear on one point : dealers do not think rates are exorbitant for the service offered. They know (who better?) how vehicles can be misuse& and badly maintained, how licences can expire or be withdrawn, how operators can work at unprofitable rates (often without knowing), how payments can be months behind, and how insurances can be insufficient. They are often financially involved and often have to chase hirers for payments.
Operators, particularly on the haulage side, have quite enough to do to clean up their own trading conditions without, making fault-finding excursions into those of others. After all, an excessive hire-purchase charge (which is not admitted) in terms of pence per ton mile over the life of the vehicle, would go into several places of decimals, wouldn't it? It is-not a very serious problem for the
carrier after all! A.S.R.