Hire Purchase: Meaning, Features, Advantages and Disadvantages [Finance Notes for AHSEC Class 12 2024 Exam]

Finance Notes for AHSEC Class 12 for 2024 Exam
Unit 4: Hire Purchase – Meaning, Features, Advantages and Disadvantages

Q.1. What do you mean by Hire purchase? What are its features?

Ans: A trader could sell goods either for cash or for credit. For goods sold on credit, the payments may be made by the buyer in lump sum on a future date, or in installments spread over for a specified period of time. When goods are sold on credit, for which payment is made by the buyer in installments over a period of time, it is called purchase system or installment system.

Hire Purchase System refers to the system wherein; the seller of goods transfers the goods to the buyer without transferring the ownership of goods. The payment for the goods will be made by the buyer in installments. If the buyer pays all the installments, the ownership of the goods will be transferred, on payment of the last installment. However, if the buyer does not pay for any installment, the goods will be repossessed by the seller and the money paid on earlier installments will be treated as hire charges for using the goods. So, under this system, the transaction may result in purchasing of goods by the buyer or in hiring the goods. Hence, the system is called Hire Purchase System.

Features and Characteristics of Hire Purchase System: The characteristics of hire-purchase system are as under

1. Hire-purchase is a system of credit sale.

2. The price under hire-purchase system is paid in installments.

3. The goods are delivered in the possession of the purchaser at the time of commencement of the agreement.

4. Hire vendor continues to be the owner of the goods till the payment of last installment.

5. The hire purchaser has a right to use the goods as a bailer.

6. The hire purchaser has a right to terminate the agreement at any time in the capacity of a hirer.

Q.2. What are the advantages and disadvantages of Hire Purchase system?

Ans: Advantages and Importance of Hire Purchase System

1. Costly items can easily be purchased by the consumers which he cannot otherwise purchase by making entire payment in lump sum.

2. It increases turnover and enhances the profitability of the enterprise.

3. It enables the consumer's family to enjoy the possession of the goods before payment is required.

4. Hirer has a right to terminate the agreement at any time before the goods is transferred.

5. Hire purchase is a rewarding field of financial investment today, because, despite the chance of bad debts, the rewards earned are higher than the normal rates of interest.

Disadvantages of hire purchase system:

1. Cost of items purchased by hire purchase system is more than the normal price as the customer has to pay interest on the balance amount.

2. Hirer does not become the owner of goods hired, until payment of last installment is made.

3. Hirer cannot sell or pledge goods hired until he becomes owner of such goods.

Q.3. What are the difference between Hire Purchase system and Sale?

Ans: Although hire purchase system could ultimately result in sale of goods, the sale in normal sense and sale under hire purchase system are not the same. The following are the differences between Hire Purchase and Sale.

Hire Purchase	Sale
Hire purchase is governed by the Hire Purchase Act, 1972.	A ‘sale’ is governed by the sale of Goods Act, 1930.
In case of Hire purchase, the ownership of goods is transferred to buyer on payment of all installments.	In case of sale, the ownership of the goods is transferred to the buyer immediately.
In case of hire purchase, the payment is made in installments.	In case of sale, the buyer makes payment in lump sum.
The hire purchaser pays for the price of goods and also some amount of interest.	The buyer pays only for the price of goods.
On non-payment of any installment, the seller can re-possess the goods.	On non-payment of the consideration the seller cannot take back the goods, but can only take legal action on buyer.