(a) What is hire purchase?
(b) Give two advantages and two disadvantages each of hire purchase to
(i) the buyer
(ii) the seller.
Explanation
(a). Hire Purchase: Hire purchase is a credit purchase by which a buyer is allowed to take possession of goods after payment of an initial deposit with subsequent instalmental payment. The goods do not become the property of the buyer until the last instalment is paid.
(b) Advantages to the buyer:
(i) it facilitates the purchase of expensive goods.
(ii) it makes possible the used of goods before final payment is made.
(iii) it increases the standard of living of the buyer.
Disadvantages to the buyer:
(i) The customer pays more for the good than when he is paying cash.
(ii) He may lose the goods if he is unable to complete payment.
(iii) He is tempted to overbuy.
(iv) He mortgages his/future earnings.
Advantages to the seller:
(i) It increases sales/turnover.
(ii) He makes higher profit resulting from higher prices.
(iii) He may repossess the goods if the buyer fails to pay.
(iv) it reduces cost of holding stock.
(v) It enhances the sale of expensive goods.
Disadvantages to the seller:
(i) it may lead to bad debts as a result of non-payment.
(ii) it ties up capital.
(iii) it leads to increased overhead cost.
(iv) it may lead to litigation.
(v) goods repossessed may be damaged or not worth the original value.
(vi) loss of goodwill as he continues to repossess goods.
(vii) there is a problem of selling repossessed goods.