In this article we will discuss about the hire purchase system of selling.
Prof. J. Stephenson defines ‘hire-purchase’ as a form of trade in which credit is granted to the customer on the security of a lien on the goods. To put in simple terms, under the hire-purchase system, a seller delivers the goods to the customer (hirer) who agrees to pay for the same by equal periodical instalments.
Each instalment is treated as hire of the goods, and on payment of a certain number of instalments, the goods become the property of the hirer (buyer- customer).
The hire-purchase transaction becomes full-fledged purchase only after the customer pays the full price. By paying the initial sum, the buyer takes possession of the concerned goods but does not became the owner unless and until the last instalment has been paid. The seller of the goods charges interest for the extended period of credit and each instalment payable by the hirer includes some interest.
The products traded under the hire-purchase system should possess the characteristics like durability, stability in quality, stability of demand, profitability, standardisation possibility, high unit price, possibility of after-sale service, etc. Thus, the products like radio, T.V., furniture, refrigerator, washing machine, sewing machines, and equipment’s are included in hire-purchase selling.
For the extension of hire-purchase facilities, a seller should exercise proper care in selecting the customer in consideration of factors like regular or stable income, age, capability to pay instalments at regular intervals, etc.
The hire-purchase selling system has got both advantages and disadvantages.
The advantages of hire-purchase selling system are:
(i) People of modest incomes can buy certain household or business-purpose valuable articles’ without having to spend a large amount of money;
(ii) Customers can enrich their standards of living;
(iii) Hire-purchase trader can tempt a large number of customers to buy costly articles and thereby increase the sales turnover of non-essential luxury goods which would otherwise be lower; and
(iv) The small and medium- scale industries can install plants and buy tools without having to find large sum of capital all at once.
The disadvantages of hire-purchase selling system are:
(i) The prices are quite high on account of inclusion of interest charges;
(ii) Extra costs of the collection of instalments;
(iii) Although the seller has a right to claim the goods in the event of non-payment of instalments by the customers, it is difficult to recover the goods;
(iv) The goods, even if recovered, are after all second-hand and cannot fetch reasonal prices; and
(v) The people may be tempted by the system to buy articles which they cannot afford.
In spite of certain drawbacks in the system, this form of retail business has been successful in Indian cities and towns.