(a) What is hire purchase? (b) Give two advantages and two disadvantages each of hire purchase to (i) the buyer (ii) the seller.

Answer Details

(a) What is hire purchase?

Hire purchase is a system of buying goods on credit in which the buyer takes possession of the goods after paying an initial deposit and then pays the balance in agreed regular instalments. Ownership of the goods does not pass to the buyer until the last instalment has been paid; until then the goods legally belong to the seller.

(b) Advantages and disadvantages

(i) To the buyer

Advantages:

1. He enjoys the use of the goods while still paying for them.
2. It enables people of low income to acquire expensive goods they could not pay for at once.

Disadvantages:

1. The total amount paid is higher than the cash price because of interest charges.
2. The goods can be repossessed by the seller if the buyer defaults, and he may lose the instalments already paid.

(ii) To the seller

Advantages:

1. He attracts more customers and sells more goods, increasing his turnover and profit.
2. He earns extra income through the interest charged on the credit.

Disadvantages:

1. His capital is tied up while waiting to collect instalments over a long period.
2. He may suffer loss through bad debts or the cost of repossessing and reselling used goods.