Advantages and Disadvantages Of Hire Purchase System: When you need to purchase your business or yourself but don’t have the money right now, you may turn to a variety of forms of financing, one of which is the hire purchase system.
The availability of the appropriate equipment is a requirement for expansion, and many firms use hire purchases to finance this equipment. Hire Purchase is one of the most regularly utilized means of finance for acquiring various assets. It helps by distributing the expensive asset’s cost across a longer time frame. As a result, it makes a significant amount of money available for other crucial uses. The hire-buy approach is one such strategy that can help a person acquire an item. It is a technique of purchasing in which the buyer of an asset obtains the item for the intended purpose and pays for it in installments.
Ownership of the asset is transferred to the buyer only– once all installments have been paid in full or the agreed-upon payment has been squared off. However, all types of financing, including the Hire buy system, have benefits and disadvantages that must be thoroughly studied to make the best decision for your organization.
If you’re thinking about using hire purchase to finance new equipment, evaluate the benefits and drawbacks listed below to help you decide. As a result, in this essay, we will analyze the Merits and demerits of the hire purchase system.
What is a “hire purchase”?
One of the most often used techniques for purchasing any asset is hire purchase. It is a set-up that enables the credit-based purchasing of a costly consumer commodity. Here, the owner or seller rents out the item to the person, but the hirer is still responsible for making the monthly installment payments. Even when the buyer receives possession, ownership is not initially transferred. Only once all payments have been received is the ownership transferred.
Technically, it is an agreement between the buyer (or user) of the asset and the financing company under which the financing company purchases the asset on behalf of the buyer, who then uses it for business purposes and recoups the cost from the financing company in a series of small payments known as hire charges.
Qualities of Hire Purchase
The features of a typical transaction are as follows:
a. As soon as the contract is signed, the hirer is immediately given the assets.
b. Throughout the contract, rent is paid in installments.
c. A contract known as a hire-purchase agreement contains all the necessary terms and conditions between the parties concerned.
d. Every rental payment is seen as a cost for using the asset. This implies that the seller has the full right to reclaim the assets if the hirer defaults on any payments.
e. Depending on the conditions of the agreement, the payments may be made annually, biannually, quarterly, monthly, etc.
f. The hirer, however, will not be entitled to a refund of any previously paid sums after returning the assets because those sums were used to pay for the hire and use of the assets.
g. When signing the contract, the hirer often pays a certain sum as a down payment.
Advantages (Merits) of Hire Purchase System
1. Spreading the expense over a specific period: You may stretch the cost of the equipment over time with monthly payments if you have a hire purchase arrangement. You also have flexibility in how much you’ll pay each month because you can make a higher down payment in exchange for cheaper installments.
2. Reduced interest: When a company considers finance, one of its main worries is how interest rates would impact them. In contrast to choices of an overdraft or bank loan, hire purchase agreements’ interest is fixed for the life of the repayment period and is frequently less expensive.
3. Beneficial For Small Dealers: The small producers and traders are blessed by this technique. They have the option of making installment purchases of machinery and equipment, which they may afterward resell to customers at full price.
4. Ease of Payment: The fact that the payment must be paid in installments naturally benefits the customer because it does not interfere with his normal routine or present cash flow. For those with little resources, this is a benefit.
5. An Increase in Profits: Because payments are made in convenient installments, this strategy draws more clients, which increases sales volume. Sales volume will ultimately increase along with earnings, which will also rise.
6. Sometimes, down payments are not required: Depending on the hire-buy arrangement, a down payment may not be required for businesses or households with excellent credit. That implies that it is possible to take the necessary items home without having to pay anything to obtain the right to do so. To prevent repossession, the buyer would still need to make the scheduled monthly installments. However, if at all possible, it is often preferable to make a down payment.
7. Interest at a Fixed Rate: The hire purchase interest rate is set for the life of the repayment period. Compared to a bank loan, this works out better. In light of this, you can decide on a predetermined payment amount for each installment that is ideal for you as well.
Disadvantages (Demerits) of Hire Purchase System
1. Obligating one to recurring fixed payments: Spreading the cost of a costly asset is generally advantageous, but you must be prepared to make the payments the whole time.
Should you experience future financial difficulties, the loan institution may be entitled to confiscate the asset.
2. Problems Recovering Installments: The vendors frequently report that the buyers do not send them their payments on schedule. They may select the incorrect buyers, which might get them into problems. To recover the installment payments, they must squander time and spend more money. This occasionally resulted in extremely contentious disputes between the buyers and sellers.
3. Higher Risk for Hire: Under such a system, the seller is at risk. Although he has the legal right to remove that asset or property from the hiree, used items are worth less than their original cost. Once again, if it is repossessed, it can have issues that need to be fixed.
If the purchaser does not pay the payment, Hiree runs the danger of losing or being unable to use the Asset.
4. Discounts are typically less prevalent: Fewer discounts are typically provided to purchasers who opt for a hire purchase arrangement as opposed to a lease arrangement or an outright purchase. Such is so because that kind of transaction has higher risks. Customers who lease an item pay for the item’s depreciation.
5. Monthly payments are determined by credit score: Buyers with bad credit can still use hire purchase agreements because they are secured loans. The lower interest rate offers, however, could not be available to you if you have a bad credit score or perhaps no credit at all (for example, if you have never borrowed money before).
6. Break Up Of Families: The system places heavy financial pressure on families that cannot afford to purchase expensive and opulent products, which leads to the breakup of many families. Numerous happy households and families have been destroyed by hire purchase purchases, according to recent research conducted in western nations.
Knowledge of the hire purchase system has been made available through this article. All parties involved benefit from both the advantages and downsides of hire purchase agreements. It offers a practical means of paying for and acquiring things that might otherwise be out of reach. However, your monthly payments will be less if you make a greater initial investment. Of course, it also works the opposite way around. To guarantee the greatest outcomes are achievable, all aspects of a deal should be carefully reviewed before signing anything.