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FAQs on Hire Purchase Sytem: Part 3 - Class Notes, Financial Accounting, Commerce - B Com
| 1. What is the meaning of Hire Purchase System? |  |
Ans. Hire Purchase System is a method of purchasing goods where the buyer pays for the goods in installments over a period of time. The ownership of the goods is transferred to the buyer after the final installment is paid.
| 2. What are the advantages of the Hire Purchase System? | |
Ans. The advantages of the Hire Purchase System are:
1. Easy Financing: Hire Purchase System allows buyers to acquire goods without making a lump sum payment. This makes it easier for individuals or businesses to afford expensive items.
2. Immediate Use: The buyer can start using the goods immediately after paying the initial down payment. This is beneficial for businesses that need to use the goods to generate income.
3. Flexibility: Hire Purchase System offers flexible repayment options, allowing buyers to choose the installment amount and duration that suits their financial capabilities.
4. Asset Security: The goods purchased through the Hire Purchase System act as collateral for the loan. This provides security to the seller in case the buyer defaults on payments.
5. Tax Benefits: In some countries, the installment payments made under the Hire Purchase System may be eligible for tax deductions, reducing the overall cost of the purchase.
| 3. What is the difference between Hire Purchase System and Installment Payment System? | |
Ans. The main difference between Hire Purchase System and Installment Payment System is the ownership of the goods. In the Hire Purchase System, the ownership is transferred to the buyer only after the final installment is paid. On the other hand, in the Installment Payment System, the ownership is transferred to the buyer immediately after the initial down payment is made.
| 4. How is interest calculated in the Hire Purchase System? | |
Ans. Interest in the Hire Purchase System is calculated based on the total cost of the goods and the duration of the installment payments. The interest rate is usually fixed at the beginning of the contract. The interest amount is then divided equally among the installments, and the buyer pays both the principal and interest in each installment.
| 5. What happens if the buyer defaults on payments in the Hire Purchase System? | |
Ans. If the buyer defaults on payments in the Hire Purchase System, the seller has the right to repossess the goods. Depending on the terms of the contract and the laws of the country, the seller may also charge penalties or take legal action against the buyer to recover the outstanding amount. The buyer may lose all the payments made up to that point, as well as the ownership of the goods.
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