What Is Hire Purchase System & Instalment Purchase System?

What Is Hire Purchase System?

The purchase system where the possession of goods is immediately obtained but the price of the assets and goods is paid in instalments method instead of cash payment is known as Hire Purchase System. There are two parties involved in the hire purchase system. They are:

1. Hire Purchaser

2. Hire Vendor

Under this system the delivery of goods and right to use the goods are transferred to the purchaser immediately on signing the agreement but the ownership of goods is transferred after the payment of last instalment or EMI.

What Is Instalment Payment System?

The purchase system under which the buyer becomes the owner of goods immediately on signing the contract it sells but the payment is made on instalment is known as Instalment Purchase System. There are two parties involved in Instalment Purchase System: seller and buyer.

In other words the purchase system where the goods become the property of the purchaser immediately when they receive the delivery is Instalment Purchase System.

Advantages Of Hire Purchase System

The hire purchase system is very much useful to different parties. Therefore it’s advantages for various parties are broadly divided into 3 categories, that is:

A. Advantages to Buyer

B. Advantages to Seller

C. Advantages to Society

Advantages to Buyer

The hire purchase system is so advantageous to the buyer. It helps buyer in different ways such as:-

1.Easy Method Of Payment:

The hire purchase system enables the purchaser to make the payment of goods in instalments. So it becomes easy for the buyer to pay the price of goods.

2.Purchase Of Valuable goods:

The Hire Purchase system encourages buyers to purchase valuable goods which are not possible for him to make cash purchases. It also helps them acquire various useful goods within a short period.

3.Encouragement to savings

The hire purchase system also develops a saving habit among people. They have to pay the instalment money on a specified date- so they save money for that date in order to avoid being defaulter.

4.Free Repairs

The hire purchase system also ensures free repairs of the goods. Under this system it is the responsibility of the vendor to make free repairs till the payment of the last instrument.

Advantages to Seller

The hire purchase system not only helps buyers but it is also very much helpful to the seller. It helps sellers in different ways such as:

1.Increase in sales

The hire purchase system enables hire vendors to increase their sales volume. This system encourages people of two class and middle class to buy the value of goods and make payment in instalments.

2.Increasing Income

The increase in sales volume needs to increase the income of the seller. It also helps to earn interest in each instalment.

3.Relation between buyer and seller

The hire purchase system ensures a close relation between buyer and seller. It requires regular meetings between the buyers and sellers that leads to intimate relations between them.

4.Sale of Other Goods

The hire purchase system gives provision to hire purchasers to visit the vendor’s shop several times. It creates interest for new products in his mine that ensures the possibility of sale of other goods.

Advantages to Society

The hire purchase system is also very much useful to society. It becomes advantages to the society in number of ways:

1.Increases in Production

The hire purchase system enables people to make more and more purchases due to payment in instalments. It indirectly increases both national income as well as national production.

2.Increase in Employment

The hire purchase system also provides opportunities for new employment. It creates various posts for salesman, adviser agent, collection agent and marketing agent etc. So a number of people can get employed to increase their livelihood.

3.Standard of living

The hire purchase enables people to purchase the valuable goods. That leads to an increase in standard of living. It also helps them to lead a comfortable and luxurious life.

Disadvantages Of Hire Purchase System

Though the hire purchase system provides so many advantages, it also suffers from certain limitations. Such limitations are further divided into 3 categories. Such as:

A.Disadvantages to Purchaser/ buyer

B.Disadvantages to Seller

C.Disadvantages to Society

Disadvantages to Purchaser/Buyer

The purchaser or buyer faces certain problems due to the hire purchase system. Some of the most important disadvantages are:

1.High Price

The Purchaser has to pay more price over cost price. The cost price includes higher changes that lead to a high price of a product.

2.Fear of Repossession

The ownership of goods is not completely transferred to the hire purchaser till the payment of the last instalment. The hire purchaser fears to close the possession of goods due to non payment of instalments.

3.Purchase Of Unnecessary Goods

The hire purchase system encourages buyers to purchase necessary goods as it does not require cash payment. But it creates difficulties for him in making the payment of instalments in future.

4.Mental Disturbance

The hire purchase remains mentally disturbed due to the tension of paying instalment. It also faces various problems to arrange instalments before the due date.

Disadvantages to Seller

The hire purchase system is also creates certain problems and difficulties for seller such limitations are:

1.Need of more capital

Under the hire purchase system the vendor requires more capital as it sells goods on credit but purchases as goods on cash. It also needs to lack a huge amount of capital.

2. Difficulty in realising instalments

The other disadvantage of the hire purchase system is difficulty in realising instalments, the hire purchaser does not make the instalments easily after purchasing the goods.

3.More expenditure

The hire purchase system is also considered as an expensive process. It leads to more expenditure to be incurred in maintaining the books of accounts.

4.Bear the loss of depreciation

The bearing of loss of depreciation of goods on Repossession is vested in the hands of the seller. So it is considered as another disadvantage of sellers faced under the hire purchase system.

Disadvantages to Society

The hire purchase system not only creates problems for sellers or buyers, it also becomes harmful to the society. It encourages lower and middle income groups of people to make unnecessary purchases, which creates problems with payments in future. It indirectly affects their social life.


What Is Down Payment?

The initial payment made by the vendor at the time of signing the hire purchase agreement is called Down Payment.

Who Is a Hire Vendor?

The seller of goods in hire purchase agreement is known as hire vendor.

Who Is the Hire Purchaser?

The buyer which is paid by hire purchaser to the vendor under hire purchase system is known as hire purchaser.

What Is the Hire Purchase Price?

The price which is paid by the hire purchaser to the vendor under hire purchase system is called hire purchase price.

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