Hire purchase and installment systems are both methods of purchasing goods or assets on credit, but they have some key differences. Hire purchase and installment systems are both common ways to finance the purchase of goods. They differ in terms of the option to purchase, the option to terminate, and the transfer of ownership.
Hire purchase involves an agreement between the buyer and seller where the seller allows the buyer to use the asset by making regular payments towards the purchase price. The buyer also has the option to fully purchase the item by paying all remaining installments.
On the other hand, an installment system is a method of financing where the buyer makes payments for the item in smaller installments, but ownership is transferred immediately.
Meaning of hire purchase
Hire purchase (HP) is a method of purchasing an item, typically a vehicle or equipment, by paying an initial deposit followed by a series of regular payments. The item is considered the property of the borrower during the hire purchase period, but ownership is transferred to the borrower once the final payment is made.
The importance of hire purchase is that it allows individuals and businesses to acquire assets they may not be able to afford to purchase outright. It also allows them to spread the cost of the asset over a period of time, making it more manageable. Additionally, hire purchase can also be an effective way to obtain financing for a business, as it allows the business to acquire assets it needs to operate without incurring a large amount of debt all at once.
Meaning of installment system
The installment system refers to a method of paying for goods or services in which the buyer makes a series of payments over a period of time, rather than paying the full amount upfront. These payments are typically made on a regular basis, such as monthly or weekly, and may include interest charges.
The method for implementing an installment system can vary depending on the type of goods or services being purchased. For example, in the case of a car loan, the buyer would typically make a down payment and then make monthly payments over a period of time to pay off the remaining balance. In the case of a furniture purchase, the buyer may make a down payment and then make weekly or monthly payments until the balance is paid off.
The importance of the installment system is that it allows individuals and businesses to purchase goods and services that they may not be able to afford upfront. It allows them to spread the cost out over time, making it more manageable and allowing them to make larger purchases. This can be beneficial for both the buyer and the seller, as it allows the buyer to acquire the goods or services they need and the seller to make a sale that they may not have otherwise been able to make. Additionally, installment systems can be used as a form of credit, helping individuals and businesses establish a credit history and build their credit scores.
Key differences between hire purchase and installment system
The major differences between hire purchase and installment system are shown in the table:
| Basis | Hire Purchase | Installment System |
| Time of ownership | The buyer does not own the item until the final payment is made. | The buyer owns the item from the first payment and can use it or dispose of it as they wish. |
| Right to Terminate | Hirer has the right to terminate the agreement and return the goods. | No right to terminate the installment purchase agreement. |
| Charges | Monthly payments are termed Hire Charges. | Monthly payments are termed Installments. |
| Risk and repair | All the risks are borne by the financing company till the last payment. | All the risks are borne by the buyer from the first day. |
| Right to sell | Right to sell lies with the financing company. | Right to sell lies with the buyer. |
Conclusion
In summary, a Hire purchase is a method of buying goods on credit while the buyer does not own the item until the final payment is made. On the other hand, an Installment system is a method of buying goods on credit while the buyer owns the item from the first payment.