Suppose you want to buy a bike the cash price of which is Rs.100000. Now you don’t have the money to buy it in one go. But you are in a condition to pay a certain amount monthly. So, you can purchase it by the hire-purchase method.
In this method, you will pay a certain amount called as down payment (Say Rs. 30000). Now the remaining amount you will have to pay is Rs. 70000. Also the rate of interest will be be applied on this 70000. After including the interest, say at the end of 2 years from the date of purchase the amount becomes 90000. In the agreement there will be a certain time period (Here, 2 years suppose) and a fixed rate of interest. Now 90000 will have to be paid in 24 months. On dividing, you will get the monthly figure as Rs. 3750. That means, you will pay Rs. 3750 as monthly installment or EMI.
The summary is – after giving a cash of Rs. 30000, you paid 120000 for a bike of price Rs. 100000 by giving Rs. 3750 monthly for 2 years. This is the hire-purchase method.
Most of the bikes, cars or any other commercial vehicles you see on the road are bought through the hire purchase system
Advantages for the Buyer (purchaser)
Hire-purchase system is useful for a buyer in the following ways.
- You can buy even though you have less money to buy an item.
2. You can get free repair service during the guarantee period if you are promised by the vendor.
3. Installments make it easier for you to pay on a monthly, quarterly or yearly basis.
4. You will get motivated to become economic as you will have the desired item to do the business.
Characteristics of Hire Purchase System
- Ownership – Once the buyer pays the last installment, he or she then acquires the ownership of the items.
2. Agreement – Buyer agrees to pay the price of the item along with the interest.
3. Right to use – The buyer has the entre right to use the item.
4. The seller can seize the item in case the buyer fails to pay the EMI.