Both hire purchase and installment sale are popular methods of financing goods. These methods are different to each other in terms of their option to purchase, a right of termination, and transfer of ownership.Hire purchase is defined as an arrangement between hirer (buyer or User) and seller of an asset whereby the seller allows the hirer to use the asset for a regular payment of installment for the purchase price. The buyer also has the option to purchase the goods on payment of all the installments. Whereas installment purchase is defined as another method of financing the capital goods / assets whereby the goods are purchased by the buyer but the payment is made in smaller installments.
Hire Purchase vs. Installment Purchase
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Both hire purchase and installment purchase may look similar as both are a method of finance and payment in both the cases is made in smaller parts. In that impression, it is interesting to know the differences between the two. Following are the points of differences in these two methods of financing.
Time of Purchase and Ownership
In the case of hire purchase, the act of purchasing takes place only when whole payment is made to the financing company. It means after making payment of the last hire charges / installment only, the goods are considered purchased or if the buyer or hirer prepays in a lump sum in between the agreed period for purchasing the goods. In the case of installment purchase, the purchase happens as soon as the agreement between the buyer and financing company is entered into. In hire purchase, both ownership and purchase is delayed till the complete payment whereas in installment purchase, purchase and ownership take place before the complete payment.
Option / Right to Terminate
The hirer, in the case of hire purchase agreement, has an option / right to terminate the agreement and return the goods whereas there is no such right or option available to the buyer in case of installment purchase. This is because the purchase has not taken place in case of hire purchase but it takes place at the beginning only.
The monthly or period payment in installment purchase is termed as installment whereas, in hire purchase arrangement, it is called hire charges. Installment derives its value from the length of time, the sale value of an asset, and interest rate whereas the hire charges is a function of two additional factors viz. option of termination and repairs and maintenance. Ideally, the installment should be less than the hire charges for the same asset. Therefore, hire purchase is an expensive system compared to installment purchase.
In hire purchase, all the risks are born by the financing company till the last payment by hirer because it is the official owner of the asset till that time. In installment purchase, the risks are borne by the buyer from day one. Similarly, repair and maintenance is the headache of financier in the case of hire purchase and buyer in case of installment purchase.
Right to Sell or Transfer
The right to sell or transfer is always exercised by the owner of the assets. In the case of hire purchase, this right lies with the financing company or seller as the case may be because they are the owners of the asset. In the case of installment purchase, it is with the buyer because he becomes the owner on the day he signs the agreement.
The default of Installment/Hire Charges
When a hirer defaults in the payment of hire charges, the financier has the right to forfeit the money paid till that date and take back the possession of the goods. Whereas in installment purchase, the installment paid are not forfeited and the financier is liable to receive the remaining dues.
In essence, the hire purchase system is suitable for the buyers who need the asset for short period or are not sure of long term needs. The cushion of returning the asset gives them this leverage. Installment system is useful for those who are sure of utilizing the asset till its lifetime and those who are capable of taking responsibility of the asset in terms of its repairs and maintenance and its wear and tear.