Hire Purchase: Meaning, Pros and Cons
Steve Oke Chapchap Market No Comments
Calculation of Cash Price will be –
- Purchaser pays a rental (the charge for hiring) for an agreed period of time.
- If the purchaser makes default in payment, the seller has the right to recover/seize asset from the purchaser.
- Frequency of installment may be yearly/quarterly/monthly etc.
- Goods possession gets transferred initially but ownership of goods remains with the seller until the payment of the final installment.
- Usually, the purchaser pays a certain percentage of cash price as a down payment.
- Since property in goods vests with a seller, he can claim depreciation on sold goods for income tax benefit purpose. Similarly, the purchaser can claim income tax benefit on hire charges (Hire purchase price minus Cash price).
- Assets can be bought into use without paying for the full amount.
- A convenient method for procuring asset in case entity is facing cash shortage or does not want to spend a huge amount at once.
- Since the amount of expenditure is well known in advance, it makes easier for the entity to make budgeting decisions.
- It can be said as a convenient way of financing an asset purchase.
- Since it creates a fixed amount payment burden on the purchaser, he may find difficulty in payment during a cash crunch position which may also lead to lose the asset and damage your credit rating.
- Cost of purchasing an asset will always be higher than purchasing on the cash price.
- Legal ownership vests with the seller which may seize the same in case of non-payment of hire purchase installments.
- If the purchased asset gets stolen/ destroyed before it is fully paid for, the insurance may not cover the replacement value which may lead you to face a shortfall (in recovery).
Based on the above discussions, advantages, disadvantages discussed and shared it cannot be outrightly said that purchasing an asset on hire purchase, in cash, a loan or lease is best. Mode of acquisition shall be decided by multiple factors based on each individual organization. But yes, it is a good option in case the entity wants to use the asset without processing 100% payment at once. However, it is a costlier method of acquisition rather than Cash Purchase as it will always include hiring charges/interest element.
This has been a guide to what is Hire Purchase Agreement and its meaning. Here we discuss the most common types of hire purchase agreement along with calculation examples & explanations. We also discuss the advantages and disadvantages. You can learn more about accounting from following articles –
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