Hire-Purchase – AHSEC Class 12 Finance Chapter 15

Here is a comprehensive study note for the AHSEC Class 12 Finance textbook, focusing on Chapter 15: Hire-Purchase.

Chapter 15: Hire-Purchase

Summary Note

This chapter explains the concept of hire-purchase, a unique method of financing the acquisition of goods. It details its meaning, features, advantages, disadvantages, and how it differs from a lease.

• Meaning of Hire-Purchase:
  • Hire-purchase is a transaction where goods are bought and sold on the term that payment will be made in periodical instalments.
  • The buyer (known as the hirer or hire-purchaser) gets immediate possession of the goods.
  • However, the legal ownership of the goods remains with the seller (known as the hire-vendor) until the last instalment is paid.
  • Each instalment is treated as a hire charge for using the asset. If the hirer defaults on any payment, the vendor has the right to repossess the goods.
• Features of a Hire-Purchase System:
  1. Agreement to Sell: It is an agreement to sell, not an immediate contract of sale. The sale is completed only after the last instalment is paid.
  2. Immediate Possession: The hirer gets possession of the goods as soon as the agreement is signed.
  3. Ownership with Vendor: Legal ownership is transferred to the hirer only upon payment of the final instalment.
  4. Down Payment: The hirer usually makes an initial payment at the time of signing the agreement, known as a ‘down payment’.
  5. Payment in Instalments: The remaining price, along with interest, is paid in periodical instalments.
  6. Right to Repossess: The hire-vendor has the right to take back the goods if the hirer defaults on payment.
  7. Right to Terminate: The hirer has the right to terminate the agreement at any time by returning the goods, without being liable for future instalments.
• Differences between Lease and Hire-Purchase:

• Advantages and Disadvantages of Hire-Purchase:
  • Advantages to the Seller (Hire-Vendor):
    • Increased Sales: Helps in increasing sales volume as customers can buy goods without paying the full price upfront.
    • Security of Payment: The vendor retains ownership and can repossess the goods in case of default, providing security.
    • Entitled to Interest: The vendor earns interest on the unpaid amount, compensating for the blocked capital.
  • Advantages to the Buyer (Hire-Purchaser):
    • Immediate Possession: The buyer gets to use the asset immediately.
    • Ownership by Instalment: Allows acquisition of costly assets through easy periodical payments.
    • Habit of Thriftiness: Encourages the habit of saving to pay the instalments.
  • Disadvantages to the Seller (Hire-Vendor):
    • Requires Huge Finance: It is a credit business and requires a large amount of capital.
    • Difficulties in Selection of Buyers: It is difficult to assess the creditworthiness of all buyers.
  • Disadvantages to the Buyer (Hire-Purchaser):
    • High Price: The total amount paid is generally higher than the cash price because it includes interest.
    • No Right of Ownership: The buyer does not have ownership rights until the end and cannot sell or mortgage the asset.

Complete Textual Question Answers

Here are the answers to all the questions given at the end of Chapter 15.

A. Very Short Answer Questions (1 Mark each)

1. What is down payment?
   Ans: A down payment is the initial payment made by the hire-purchaser to the hire-vendor at the time of signing the hire-purchase agreement.
2. What type of goods are sold under hire-purchase system?
   Ans: Goods sold under the hire-purchase system are typically of a durable and re-saleable nature, and often of higher value, such as vehicles, machinery, and consumer durables.

B. Short Answer Questions (2 Marks each)

1. What is hire-purchase?
   Ans: Hire-purchase is a transaction where goods are purchased and sold on terms that payment is made in instalments, possession is given immediately, but ownership remains with the vendor until the last instalment is paid.
2. State two features of hire-purchase system?
   Ans: Two features of the hire-purchase system are:
   i. The possession of the goods is given to the buyer immediately on signing the agreement.
   ii. The ownership of the goods remains with the vendor until the last instalment is paid.
3. Write two advantages of hire-purchase system to the seller.
   Ans: Two advantages to the seller are:
   i. Helps in increase in sales volume: It boosts sales as customers can acquire goods without a large upfront payment.
   ii. Provides security of payment: The seller retains ownership and can repossess the goods if the buyer defaults.
4. Write two advantages of hire-purchase system to the buyer.
   Ans: Two advantages to the buyer are:
   i. Hire buyer gets immediate possession: The buyer can use the asset immediately after making a small down payment.
   ii. Ownership by instalment payment: It allows the buyer to become the owner of a costly asset by paying in easy periodical instalments.
5. Write two disadvantages of hire-purchase system to the seller.
   Ans: Two disadvantages to the seller are:
   i. Requirement of huge finance: Since it is a credit business, it requires a large amount of working capital.
   ii. Difficulties in selection of buyers: It is difficult for the seller to accurately assess the creditworthiness of every buyer, leading to a risk of default.
6. Write two disadvantages of hire-purchase system to the buyer.
   Ans: Two disadvantages to the buyer are:
   i. High Price: The total cost of the asset is higher than its cash price because it includes interest charges.
   ii. No right of ownership: The buyer does not have ownership rights until the final payment and cannot sell or mortgage the asset.
7. Write two differences between lease and hire-purchase.
   Ans: Two differences are:
   i. In a lease, ownership always remains with the lessor, whereas in hire-purchase, ownership is transferred to the hirer after the final payment.
   ii. A down payment is generally required in hire-purchase, but it is not required in a lease.

C. Long Answer Questions (Type-I) (5 Marks each)

1. State five features of hire-purchase system.
   Ans: Five features of the hire-purchase system are:
   • Agreement to Sell Goods: It is an agreement to sell, not an immediate sale. The sale is completed only upon the fulfilment of all conditions.
   • Possession of Goods on Signing: The buyer gets immediate possession of the goods after signing the agreement.
   • Ownership Remains with Seller: Legal ownership of the goods stays with the seller (vendor) until the buyer (hirer) pays the last instalment.
   • Down Payment: The buyer usually makes an initial payment, known as a down payment, at the start of the agreement.
   • Payment in Periodical Instalments: The balance amount, including interest, is paid by the buyer in regular instalments (e.g., monthly, quarterly).
2. Write five advantages of hire-purchase system to the buyer.
   Ans: Five advantages to the buyer are:
   • Immediate Possession: The buyer gets to use the asset immediately without paying the full price.
   • Ownership by Instalment: It allows the acquisition of costly assets through easy, manageable payments over time.
   • Payment through Earning: The buyer can use the asset productively (e.g., a taxi) and use the income generated to pay the instalments.
   • Option to Return Goods: The buyer has the option to terminate the agreement and return the goods if they no longer meet their needs.
   • Habit of Thriftiness: It encourages a habit of saving and financial discipline as the buyer has to set aside funds for regular instalment payments.
3. Write the disadvantages of hire-purchase system to the seller and buyer.
   Ans:
   Disadvantages to the Seller (Hire-Vendor):
   • Requirement of Huge Finance: It is a credit business and requires a large amount of capital to be blocked in receivables.
   • Difficulties in Selection of Buyers: It is difficult to accurately judge the creditworthiness of every buyer, increasing the risk of default.
   • Risk of Repossession: If the goods are repossessed, they may be in poor condition, and selling them might result in a loss.
     Disadvantages to the Buyer (Hire-Purchaser):
   • High Price: The total amount paid is higher than the cash price due to the inclusion of interest.
   • No Right of Ownership: The buyer is not the legal owner until the last payment and cannot sell or modify the asset.
4. Write five differences between lease and hire-purchase system.
   Ans: (Refer to the table in the summary and explain five points of difference in detail, covering Ownership, Down Payment, Tax Benefits, Maintenance, and Nature of Asset).

D. Long Answer Questions (Type-2) (8 Marks each)

1. What is hire-purchase system? State the features of hire-purchase system.
   Ans: (Combine the answers from B.1 and C.1. Start with a clear definition of the hire-purchase system. Then, discuss its various features in detail, such as it being an agreement to sell, immediate possession, retention of ownership by the vendor, down payment, instalment payments, and the right of repossession).
2. What is hire-purchase system? State the advantages and disadvantages of hire-purchase system to the buyer.
   Ans: (First, define the hire-purchase system as in B.1. Then, discuss the advantages for the buyer as in C.2. Finally, discuss the disadvantages for the buyer, such as the high price and lack of ownership rights until the end).
3. What is hire-purchase system? State the advantages of hire-purchase system to the seller and buyer.
   Ans: (First, define the hire-purchase system as in B.1. Then, discuss the advantages for the seller, such as increased sales and security of payment. After that, discuss the advantages for the buyer, such as immediate possession and payment in easy instalments).

Previous Year AHSEC Question Answers (2015-2025)

Short Questions (1-2 Marks)

• What is Hire-Purchase? (AHSEC 2015, 2019)
  Ans: Hire-purchase is a system where a buyer acquires an asset by paying in instalments, gets immediate possession, but the ownership is transferred only after the final instalment is paid.
• What is a down payment in a hire-purchase system? (AHSEC 2017)
  Ans: A down payment is the initial lump sum payment made by the hire-purchaser to the hire-vendor at the time of entering into a hire-purchase agreement.
• Mention two features of a hire-purchase system. (AHSEC 2018, 2022)
  Ans: Two features are: (i) The buyer gets immediate possession of the goods, and (ii) The seller retains legal ownership of the goods until the last instalment is paid.

Long Questions (5-8 Marks)

• Distinguish between Lease and Hire-Purchase. (AHSEC 2016, 2020)
  Ans: (This answer is the same as the textual Long Answer Question C.4. Please refer to that answer above, using a table for clarity).
• Explain the features of a hire-purchase system. (AHSEC 2017, 2021)
  Ans: (This answer is the same as the textual Long Answer Question C.1. Please refer to that answer above).

10 Most Important Questions

1. Who is the owner of the goods during the hire-purchase period?
   Ans: The hire-vendor (the seller) remains the legal owner of the goods until the last instalment is paid by the hire-purchaser.
2. What right does the hire-vendor have if the hirer defaults on payment?
   Ans: The hire-vendor has the right to repossess (take back) the goods from the hirer.
3. What is the main difference between a hire-purchase and a normal credit sale?
   Ans: In a normal credit sale, ownership of the goods is transferred to the buyer immediately. In a hire-purchase, ownership is transferred only after the final instalment is paid.
4. Can the hire-purchaser sell the asset before paying the last instalment? Why or why not?
   Ans: No, the hire-purchaser cannot sell the asset because they are not the legal owner of the asset until the last instalment is paid.
5. What are the two components of a hire-purchase instalment?
   Ans: Each instalment consists of two components: a part of the principal cash price and an interest charge on the outstanding balance.
6. Why is hire-purchase attractive for buyers of consumer durables like cars and refrigerators?
   Ans: It is attractive because it allows them to acquire and use expensive goods immediately by making a small down payment and paying the rest in easy, affordable monthly instalments.
7. How does the hire-purchase system provide security to the seller?
   Ans: It provides security because the seller retains ownership of the goods. If the buyer defaults, the seller can simply take the goods back, minimizing their financial loss.
8. What is the ‘option to return the goods’ for the hirer?
   Ans: The hirer has the right to terminate the agreement at any time by returning the goods to the vendor. In this case, they do not have to pay any further instalments.
9. Who is responsible for the repair and maintenance of the asset under hire-purchase?
   Ans: The hire-purchaser (the buyer) is responsible for the repair and maintenance of the asset as they have possession and are using it.
10. In terms of tax benefits, what can a hire-purchaser claim?
    Ans: A hire-purchaser who uses the asset for business purposes can claim tax deductions for the depreciation of the asset and the interest component of the instalments paid.