Facility of buying
People with small income can buy expensive articles such as car, house, furniture, etc. They can make payment in easy installments and thereby improve their standard of living. The buyer can return the goods if he is not satisfied with their quality or is unable to pay further installments.
Thrift and savings
Hire purchase system encourages people to reduce expenses and save money to pay installments at regular intervals.
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Higher sales
Hire purchase system helps to widen market for costly goods. People who cannot buy such goods otherwise are tempted to purchase them on installments. The seller can take back the goods if buyer makes default in payment.
Boon to small producers
Small scale units and farmers can buy machinery and equipment and pay installments out of earnings. For example, an unemployed graduate can buy a taxi through hire purchase, earn money from the taxi and pay installments out of such income. Disadvantages
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1. Extravagance:
Hire purchase system induces middle class people to buy luxury goods which they cannot otherwise afford. They are tempted to pledge their future income. They may not be able to pay installments in time. They suffer heavy loss when the seller takes back the goods on default of payment.
2. Higher prices:
The buyer has to pay much higher prices than that payable on cash purchase. The seller adds a margin to cover interest and risk. The seller may pass on goods of doubtful quality by offering easy credit terms. The buyer does not get ownership of goods until last installment paid. He cannot sell the goods before final payment.
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3. Risk of bad debts:
When the buyer fails to pay installments, the seller may suffer loss. He may have to spend money and time to recover goods from the buyer. There is risk of loss of goods lying with the buyer.
4. Large investment:
The hire purchase seller has to invest considerable funds because payments are received from buyers over a long period of time.