Buying a costly asset with cash is not possible for every individual as in the majority of cases people do not have immediate cash with them to purchase the asset, in such cases hire purchase method comes to their rescue. Hire purchase method is the method of purchase where the buyer of asset purchases the asset but payment of that purchase is made in installments. In order to understand this concept better, let’s look at some of the advantages and disadvantages of hire purchase –
Advantages of Hire Purchase
- First and foremost advantage of hire purchase is that for individuals who do not have enough liquidity for making big purchase than this method comes in handy as individual have to pay money in installments over a period of time and does not have to pay all the amount at one go. So for example if the cost of asset is $30000 then an individual who is from low income category will naturally find in tough to pay $30000 at one go, however if he is asked to pay $500 per month then an individual will be happy as it will not put him or her in immediate cash crunch situation.
- Another advantage of hire purchase system is that buyer can take the good purchased immediately though he or she becomes the owner of goods only on last payment of the installment. Hence under hire purchase system buyer has the benefit of using goods without paying the full amount of purchase, in simple words buyer can use the goods without being the owner of the goods.
- Due to this method seller also benefit as it leads to increased sales because due to installment system many people are able to buy which in turn results in increase in the sales of the seller leading to greater profits for the seller.
Disadvantages of Hire Purchase
- The biggest disadvantage of this method is that if buyer fails to pay even last installment then the seller will take possession of goods because in case of hire purchase the buyer does not become the owner of the asset until and unless the buyer has paid the last installment. Hence if due to some unforeseen circumstances the buyer is not able to pay than he or she will lose possession of the asset.
- Another disadvantage of hire purchase is the presence of interest rate which is quite high which in turn results in higher cost of asset to the buyer and hence in a way a buyer will have to pay more in case of hire purchase of asset than cash purchase of asset if one ignores opportunity cost of capital.
- In case of hire purchase as far as sellers are concerned not every buyer pays installment on time which leads to additional strain in terms of effort and money on the seller for timely recovery of installment and if buyer is unable to pay the amount then acquisition of asset back from buyers is also a tricky task.
As one can see from the above that hire purchase system has both advantages as well as disadvantages, however this method is quite popular both in developed countries as well as in developing countries.