HIRE PURCHASE Lesson Note
Learning Objectives
This SS3 COMMERCE lesson note covers HIRE PURCHASE for First Term, Week 4.
Lesson Note
Learning Objectives
At the end of the lesson, students should be able to:
1. Define hire purchase.
2. State and explain the features of hire purchase.
3. Identify the parties involved in a hire-purchase agreement.
4. Explain the merits and demerits of hire purchase.
5. Explain how a hire-purchase agreement can be terminated.
A. MEANING OF HIRE PURCHASE
Hire purchase is a system of acquiring goods whereby the buyer takes possession of the goods immediately and pays for them by instalments, but ownership is transferred to the buyer only after the final instalment has been paid and the conditions of the agreement have been fulfilled.
B. FEATURES OF HIRE PURCHASE
The major features of hire purchase include:
1. Payment by Instalments
The total price is paid in parts over an agreed period.
2. IMMEDIATE POSSESSION
The hirer takes possession of the goods and can use them immediately.
3. OWNERSHIP REMAINS WITH THE SELLER
The seller or finance company retains ownership until the required payments and conditions are completed.
4. INITIAL DEPOSIT
The hirer may be required to pay an initial deposit before taking possession of the goods.
5. INSTALMENT PAYMENTS
The remaining balance is paid through regular instalments.
C. PARTIES TO A HIRE-PURCHASE AGREEMENT
There are usually two main parties to a hire-purchase agreement:
1. The Hirer
The hirer is the person who obtains possession of the goods and agrees to pay for them by instalments.
2. The Owner
The owner is the person or company that owns the goods and allows the hirer to possess and use them in return for agreed payments.
The owner may be: The manufacturer or dealer; or a finance company that purchases the goods and provides them under hire purchase
D. CONDITIONS OF HIRE PURCHASE
The main conditions of a hire purchase agreement include:
1. Payment of deposit – The hirer usually pays an initial amount called a deposit before taking possession of the goods.
2. Payment by instalments – The remaining balance is paid in agreed installments over a specified period.
3. Ownership remains with the seller – The seller retains legal ownership of the goods until all the agreed installments have been paid.
4. Possession is given to the hirer – The hirer can use the goods immediately after the agreement, even though ownership has not yet passed.
5. Right to terminate – The hirer may return the goods and terminate the agreement, subject to the terms of the contract and application
E. MERITS OF HIRE PURCHASE
1. Immediate Possession
The buyer can use the goods without paying the entire price at once.
2. Convenient Payment
Payment is spread over an agreed period, making expensive goods easier to acquire.
3. Encourages Sales
Retailers and manufacturers can sell more goods because customers can pay gradually.
4. Access to Expensive Goods
People who cannot afford the full cash price immediately may obtain useful assets through installment payments.
5. Predictable Payments
The hirer usually knows the amount and timing of installments specified in the agreement.
F. DEMERITS OF HIRE PURCHASE
1. Higher Total Cost
The total hire-purchase price is usually higher than the cash price.
2. Risk of Repossession
Failure to meet the terms of the agreement may result in repossession of the goods, subject to applicable law.
3. Financial Burden
Regular installment payments can place pressure on the hirer's income.
4. No Immediate Ownership
The hirer normally does not become the owner until the required payments and conditions have been completed.
5. Restrictions on the Goods
The agreement may restrict the hirer's ability to sell, transfer or otherwise dispose of the goods before ownership
G. TERMINATION OF HIRE PURCHASE
1. The owner may terminate the agreement and seek repossession where the hirer seriously breaches the terms, such as persistent failure to make required payments, subject to applicable law.
2. Mutual Agreement
The parties may agree to end the contract on terms acceptable to both parties.
H. BREACH OF CONTRACT
A serious breach of the agreement may give the affected party a legal right to terminate the contract, subject to the terms of the agreement and applicable law.
Evaluation
OBJECTIVES QUESTIONS
1. Hire purchase is a system of acquiring goods by ______.
A. paying the full cash price immediately
B. paying for goods by instalments while taking possession immediately
C. borrowing goods permanently
D. receiving goods free of charge
2. Under a hire-purchase agreement, ownership normally passes to the hirer after ______.
A. the first instalment
B. taking possession
C. completion of the required payments and conditions
D. signing an advertisement
3. The person who takes possession of goods under hire purchase is called the ______.
A. owner
B. hirer
C. wholesaler
D. manufacturer
4. The person or company that owns the goods under a hire-purchase agreement is called the ______.
A. hirer
B. consumer
C. owner
D. agent
5. Which of the following is a feature of hire purchase?
A. Payment must always be made in one lump sum.
B. The hirer takes possession immediately.
C. Ownership always passes on the first day.
D. The goods cannot be used by the hirer.
6. One major merit of hire purchase is that it ______.
A. allows immediate use of goods without full payment at once
B. always reduces the total price
C. eliminates all financial obligations
D. gives immediate ownership in every case
7. One disadvantage of hire purchase is that the total amount paid may be ______ the cash price.
A. lower than
B. equal to
C. higher than
D. unrelated to
8. Failure to meet the terms of a hire-purchase agreement may result in ______.
A. automatic ownership
B. repossession, subject to applicable law
C. free ownership
D. cancellation of all payments
9. A hire-purchase agreement may be terminated by the hirer when ______.
A. the agreement and applicable law permit voluntary termination
B. the hirer wants to increase the price
C. the owner refuses to sell any goods
D. the hirer has never taken possession
10. Which of the following is NOT an advantage of hire purchase?
A. Immediate possession
B. Payment by instalments
C. Access to expensive goods
D. Total cost is always lower than the cash price
Theory Questions
1a. What is hire purchase
1b. list three features of hire purchase
1c. list two parties to a hire purchase