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    1.merits and Demerits of Hire Purchase Financing

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    Khushboo Gupta
    This document discusses the merits and demerits of hire purchase financing and factors to consider when deciding whether to lease or purchase a facility. The key points are: 1) The merits of hire purchase financing include convenience of installment payments, increased sales volume, increased profits, encouraging savings, and helping small traders purchase equipment. Demerits include higher prices due to interest, artificial demand creation, heavy risks, and difficulties recovering installments. 2) When deciding between leasing and purchasing a facility, factors to consider are capital requirements, ownership, term length, risk/reward allocation, and tax benefits. Purchasing requires more upfront capital while leasing has lower monthly payments but no ownership. Leasing terms are

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    1.merits and Demerits of Hire Purchase Financing

    Uploaded by

    Khushboo Gupta
    309 views4 pages
    This document discusses the merits and demerits of hire purchase financing and factors to consider when deciding whether to lease or purchase a facility. The key points are: 1) The merits of hire purchase financing include convenience of installment payments, increased sales volume, increased profits, encouraging savings, and helping small traders purchase equipment. Demerits include higher prices due to interest, artificial demand creation, heavy risks, and difficulties recovering installments. 2) When deciding between leasing and purchasing a facility, factors to consider are capital requirements, ownership, term length, risk/reward allocation, and tax benefits. Purchasing requires more upfront capital while leasing has lower monthly payments but no ownership. Leasing terms are

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    This document discusses the merits and demerits of hire purchase financing and factors to consider when deciding whether to lease or purchase a facility. The key points are: 1) The merits of hire purchase financing include convenience of installment payments, increased sales volume, increased profits, encouraging savings, and helping small traders purchase equipment. Demerits include higher prices due to interest, artificial demand creation, heavy risks, and difficulties recovering installments. 2) When deciding between leasing and purchasing a facility, factors to consider are capital requirements, ownership, term length, risk/reward allocation, and tax benefits. Purchasing requires more upfront capital while leasing has lower monthly payments but no ownership. Leasing terms are

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    309 views4 pages

    1.merits and Demerits of Hire Purchase Financing

    Uploaded by

    Khushboo Gupta
    This document discusses the merits and demerits of hire purchase financing and factors to consider when deciding whether to lease or purchase a facility. The key points are: 1) The merits of hire purchase financing include convenience of installment payments, increased sales volume, increased profits, encouraging savings, and helping small traders purchase equipment. Demerits include higher prices due to interest, artificial demand creation, heavy risks, and difficulties recovering installments. 2) When deciding between leasing and purchasing a facility, factors to consider are capital requirements, ownership, term length, risk/reward allocation, and tax benefits. Purchasing requires more upfront capital while leasing has lower monthly payments but no ownership. Leasing terms are

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    1.

    MERITS AND DEMERITS OF HIRE PURCHASE


    FINANCING.

    Hire Purchase System is a system under which money is paid for


    goods by means of periodical installments with the view of
    ultimate purchase. All money being paid in the mean time is
    regarded as payment of hire and the goods become the property
    of the buyers only when all the installments have been paid.

    Merits of Hire Purchase System:

    (1) Convenience in Payment:


    The buyer is greatly benefited as he has to make the payment in installments. This system is
    greatly advantageous to the people having limited income.

    (2) Increased Volume Of Sales:


    This system attracts more customers as the payment is to be made in easy installments. This
    leads to increased volume of sales.

    (3) Increased Profits:


    Large volume of sales ensures increased profits to the seller.

    (4) Encourages Savings:


    It encourages thrift among the buyers who are forced to save some portion of their income for
    the payment of the installments. This inculcates the habit to save among the people.

    (5) Helpful For Small Traders:


    This system is a blessing for the small manufacturers and traders. They can purchase machinery
    and other equipment on installment basis and in turn sell to the buyer charging full price.
    Demerits of Hire Purchase System:

    (1) Higher Price:


    A buyer has to pay higher price for the article purchased which includes cost plus interest. The
    rate of interest is quite high.

    (2) Artificial Demand:


    Hire purchase system creates artificial demand for the product. The buyer is tempted to purchase
    the products, even if he does not need or afford to buy the product.

    (3) Heavy Risk:


    The seller runs a heavy risk under such system, though he has the right to take back the articles
    from the defaulting customers. The second hand goods fetch little price.

    (4) Difficulties in Recovery of Installments:


    It has been observed that the sellers do not get the installments from the purchasers on time.
    They may choose wrong buyers which may put them in trouble. They have to waste time and
    incur extra expenditure for the recovery of the installments. This sometimes led to serious
    conflicts between the buyers and the sellers.

    (5) Break Up Of Families:


    The system puts a great financial burden on the families which cannot afford to buy costly and
    luxurious items. Recent studies in western countries have revealed that thousands of happy
    homes and families have been broken by hire purchase buying’s.

    2
    2. Factors to Consider: Lease or Purchase of a
    Facility

    Buy vs Lease dilemma is faced by most of the entrepreneurs. The


    decision on whether to buy or lease is dependent on number of factors
    such as duration for which such an asset would be required, the returns
    that the business will generate on the asset, type of asset and related
    technological developments etc.

     CAPITAL
    Purchasing requires more capital (cash reserve or lender support)
    whereas in capital requirement under leasing contracts is limited and
    monthly payments also account to a smaller amount.

     OWNERSHIP
    When you buy equipment, you are the ultimate owner and
    Under leasing, the lessee is not the owner of the asset.

     TERM
    Buying decision is not related to the term of the asset as the owner can
    use it till the end of its useful life. Leasing agreements are run usually
    for a fixed term and at the end of the term.

    3
     RISK & REWARD
    Given that the ownership lies with the purchaser, the buyer is
    responsible for all risks and rewards associated with the asset.
    Under operating lease, all the rewards associated with the asset remain
    with the lessor.

     TAX BENEFITS
    Purchasing an asset will bring you limited tax benefit. If the asset is
    funded using existing cash reserves, there is likely no tax benefit at all.
    Under a lease contract, all the lease payments are fully tax deductible.
    This will include any lease rental payment plus the interest on any
    outstanding lease amount.

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