Hire Purchase and Installment | Explanation | Advantages | Disadvantages

Hire purchase System

Under hire purchase system, the seller agrees to sell the article on the condition that the buyer shall pay the purchase price through installments.The article is not legally sold to the buyer in hire purchase system.

The buyer/hirer makes an initial payment called ‘down payment‘ and the balance amount due to the vendor (seller) in installments together with interest. Ownership in the goods is transferred from seller to the buyer only on the payment of last installment. So, if the buyer defaults to pay the installment amount, the goods will be repossessed by the seller.

Installment System

The Installment system is almost similar to the hire purchase system. The main difference between the two is that in installment system, the buyer gets the ownership rights as soon as the contract is signed with the seller. If he makes any default in payment of any installment, the seller can repossess the article only with the help of the Court.

Hire purchase and installment systems facilitate brisk sale of consumer durable. Commodities like two wheeler, television sets, radios, refrigerators, cycle, furniture etc., are sold in large volumes under hire purchase and installment system.

The products to be sold under these systems should be

  1. durable,
  2. high in quality,
  3. fashionable
  4. standardized; and
  5. high priced.

Advantages of Hire Purchase and Installments systems

1. The hire purchase and installment schemes enable the buyers to buy goods which are beyond their reach.

2.It also enables the business to find buyers for their products. A business cannot always look for cash parties for products that are expensive in nature.

3. It widens the market.

4. Middlemen are eliminated

5. It has helped the finance companies to develop their business. Now-a-days finance companies finance several articles widely under hire purchase and installment system.

6. Price is stabilized.

7. As convenience and luxury goods are sold under hire purchase and installment system, the standard of living of the people increases.

8. Sellers can increase their sales. Moreover, sales under the hire purchase and installment system are more profitable.

9. These days, most business houses come out with a number of offers, like free gifts, exclusively for hire-purchase customers.

Disadvantages of Hire Purchase and Installment systems

1. Hire purchase and installment system tempt the buyers to buy goods which are beyond their means. So, it becomes extravagant.

2. The buyer pays a very high price fro the article under such schemes. This is because, he has to pay interest on the outstanding balance.

3. The need of the hour is savings. Schemes like hire-purchase make the people spendthrifts.

4. Hire purchase price is higher than the cash price. Buyers under hire purchase system are charged interest. The rate of interest is often higher.

5. If buyers default in payment, goods sold under hire purchase system are repossessed by the hire vendor. The purchaser suffers a huge loss on repossessed goods.

6. Hire purchase and installment transactions are cumbersome. An agreement has to be entered into and guarantee is to be given. More legal formalities are to be gone through.

7. The rate of default under hire purchase and installment system is higher. It is because only people with inadequate means buy under this system.

8. A number of legal formalities will have to be fulfilled by the buyer. He may have to find a guarantor. The agreement must be prepared and signed by both the seller and the buyer and it must be witnessed. The document of title will vest with the vendor/financier till the dues are cleared by the hirer.