Hire Purchase and Installment Systems Explained

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Mudunuri Satyanarayana Raju

Hire Purchase and Installment System
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
a) Durable,
b) High in quality,
c) Fashionable
d) Standardized; and
e) 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
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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.(విపరీతం)
2. The buyer pays a very high price for 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.
Advantages of Hire purchase system:

1. Convenience in Payment:
The buyer is greatly benefited as he has to make the payment in installments. This
system is greatly advantageous to the people having limited income.
2. Increased Volume Of Sales:
This system attracts more customers as the payment is to be made in easy
installments. This leads to increased volume of sales.
3. Increased Profits:
Large volume of sales ensures increased profits to the seller.
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4. Encourages Savings:
It encourages thrift among the buyers who are forced to save some portion of
their income for the payment of the installments. This inculcates the habit to save
among the people.
5. Helpful For Small Traders:
This system is a blessing for the small manufacturers and traders. They can
purchase machinery and other equipment on installment basis and in turn sell to
the buyer charging full price.
6. Earning Of Interest:
The seller gets the installment which includes original price and interest. The
interest is calculated in advance and added in total installments to be paid by the
buyer.
7. Lesser Risk:
From the point of view of seller this system is greatly beneficial as he knows that
if the buyer fails to pay one installment, he can get the article back.
Disadvantages of Hire Purchase System:

(1) Higher Price:
A buyer has to pay higher price for the article purchased which includes cost plus
interest. The rate of interest is quite high.
(2) Artificial Demand:
Hire purchase system creates artificial demand for the product. The buyer is
tempted to purchase the products, even if he does not need or afford to buy the
product.
(3) Heavy Risk:
The seller runs a heavy risk under such system, though he has the right to take
back the articles from the defaulting customers. The second hand goods fetch
little price.
(4) Difficulties in Recovery of Installments:
It has been observed that the sellers do not get the installments from the
purchasers on time. They may choose wrong buyers which may put them in
trouble. They have to waste time and incur extra expenditure for the recovery of
the installments. This sometimes led to serious conflicts between the buyers and
the sellers.
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Multiple Answers
1. A refrigerator is priced at 10,000. A deposit of 16% on simple interest of 11% per
year over 2 year and repayments paid monthly then the amount of deposit made
is
A) 2,000 B) 2,150 C) 1,950 D) 1,600
Calculation: Calculate deposit @16% on the Price
2. The television is priced at 10,000. A deposit of 16% on simple interest of 11% per
year over 2 year and repayments paid monthly then the monthly installment is
A) 457 B) 447 C) 437 D) 427
Calculation : Deduct 1600 from the price add interest @11% for 24 months and
divide by 24 to arrive at the monthly EMI (10000-1600*11%*2/24)
3. The television is priced at 10,000. A deposit of 16% on simple interest of 11% per
year over 2 year and repayments paid monthly then the total amount to pay in 24
monthly installments after deposit is
A) 10,248 B) 11,248 C) 13,248 D) 1,848
Calculation: Cost of the television- deposit*11%*2- loan amount
10000-1600=8400*11%*2=1848 interest Total payment 8400+1848=10248
4. A refrigerator is priced at 10,000. A deposit of 16% on simple interest of 11% per

year over 2 year and repayments paid monthly then the interest on remaining
amount for 2 years after deposit is
A) 2,148 B) 1,848 C) 1,948 D) 2,048
5. Ramana buys a designer furniture set at price of 1200. He pays 25% down
payment and interest in 36 months plus outstanding balance. The interest
charged on balance is 12%. The total hire purchase price is
A) 1,824 C) 1,624
B) 1,724 D) 1,524
6. The act of buying an asset without having to make full payment in the immediate
future is known as:
A) Hire purchase
B) Sale and leaseback
C) Finance lease
D) Operating lease
7. When repaying by instalments to a supplier for a hire purchase, the double entry
to record this repayment would be:
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Debit Credit
A) Profit & Loss Supplier
B) Cashbook Asset
C) Supplier Cash
D) Profit & Loss Cash
8. The taking of goods away from customers who fail to keep up with hire purchase
payments is known as what?
A) Repossession.
B) Reallocation.
C) Reapportionment.
D) Readmission.
9. If the firm stops making repayments and the goods or assets are taken away from
them as a result, this is known as
A) Annulment
B) Cancellation
C) Repossession
D) Forfeiture
10. Which of the following would not make a distinction between a hire purchase and
a ‘normal’ purchase?
A) Trade discounts cannot be offered on hire purchase
B) Asset does not belong to purchaser when delivery is received from supplier
C) Purchaser pays for item by instalments over a period of time
D) Cost to buyer is likely to be higher than it would be for a normal purchase
11. On the balance sheet of a company, the value of the asset bought through hire
purchase will appear as
A) Cost less depreciation to date
B) Cost less depreciation to date less amount owing on hire purchase
C) Cost less amounts owing on hire purchase
D) Cost less depreciation to date less amount owing on hire purchase less interest
owing
12. The depreciation on an asset purchased through hire purchase should be:
A) Based on the cost price of the asset only
B) Should be straight line only
C) Based on the total cost including interest
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D) No depreciation should be provide until the final payment is made
13. The profit on interest charged on the hire purchase should appear in the profit
and loss account in what manner?
A) Interest should be apportioned in proportion to the repayment totals
B) The total interest levied should be divided equally over the total period the for
purchase agreement
C) The interest charged in that period only should be included
D) Interest should instead be capitalised on the balance sheet
14. When does the asset legally belong to the purchaser under a hire purchase
agreement?
A) Final instalment is paid and purchaser agrees to a legal option to buy the
asset
B) On date of first instalment in repayment
C) Final instalment is paid
D) Purchaser agrees to legal option to buy the asset
15. Which of the following does not give a difference between a hire purchase and a
normal purchase?
A) Legal ownership of asset.
B) Quality of asset purchased.
C) Timing of payment for asset.
D) Total cost of asset.
16. Which of the following would account for the interest charges relating to hire
purchase?
Debit Credit
A) Hire purchase interest Supplier
B) Hire purchase interest Profit and loss
C) Profit and loss Supplier
D) Cashbook Hire purchase interest
17. The act of buying an asset without having to make full payment in the immediate
future is known as: Hire purchase
18. The double entry need to record the purchase of an asset through hire purchase
would be: Fixed asset Dr To Supplier
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19. When repaying by instalments to a supplier for a hire purchase, the double entry
to record this repayment would be Supplier A/C Dr to Cash/ bank
20. If the firm stops making repayments and the goods or assets are taken away from
them as a result, this is known as: Repossession
21. Which of the following would not make a distinction between a hire purchase and
a ‘normal’ purchase? Trade discounts cannot be offered on hire purchase
22. On the balance sheet of a company, the value of the asset bought through hire
purchase will appear as: Cost less depreciation to date
23. The depreciation on an asset purchased through hire purchase should be: Based
on the cost price of the asset only
24. The profit on interest charged on the hire purchase should appear in the profit
and loss account in what manner? The interest charged in that period only
should be included
25. When does the asset legally belong to the purchaser under a hire purchase
agreement? Final instalment is paid and purchaser agrees to a legal option to
buy the asset
26. Which of the following does not give a difference between a hire purchase and a
normal purchase? Quality of asset purchased.
27. Which of the following would account for the interest charges relating to hire
purchase? Interest A/ C Dr to Supplier
28. The taking of goods away from customers who fail to keep up with hire purchase
payments is known as what? Repossession.

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1

Mudunuri Satyanarayana Raju

Advantages of Hire Purchase and Installments systems

Disadvantages of Hire Purchase and Installment systems

Advantages of Hire purchase system:

Disadvantages of Hire Purchase System:

4. A refrigerator is priced at 10,000. A deposit of 16% on simple interest of 11% per

D) No depreciation should be provide until the final payment is made

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