Hire Purchase, Credit Sales and Deferred Payment

Hire purchase is an installment payment system where a seller permits a buyer to possess a product on a hire basis following a deposit.

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Payment with a VISA card. Photo by Clay Banks on Unsplash
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In this post, we have examined the concept of credit sales, its meaning, and its types. We also talked about the benefits and drawbacks of hire purchase for both the seller and the buyer. From there, we moved on to deferred payment and its features. We made comparisons between hire purchase and deferred payment. And for our icing on the cake, we settled on the concept of conditional sales.

Credit Sales

Credit sales are the exchange of goods or services from a seller to a buyer without immediate payment. This transaction allows the buyer to receive the desired products or services upfront and commit to payment at a later, agreed-upon date. Unlike cash transactions, where immediate value is exchanged, credit sales operate on a deferred payment basis.

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Types of Credit Sales

1. Book-Me-Down: Book-Me-Down is a unique system where individuals, typically workers, purchase goods even when they run short of funds before the month ends. Their names are logged or “booked down” by the seller, and they settle their dues once they receive their salaries at the end of the month.

2. Credit Cards: Credit cards operate by allowing cardholders a predetermined credit limit. Users can make purchases using the card without immediate payment. Instead, they are expected to repay the borrowed amount within a specified period. The outstanding balance often incurs interest if it is not paid in full by the due date.

3. Trade Credit: Trade credit allows manufacturers to obtain funds from wholesalers to produce goods. These manufacturers later reimburse the wholesalers by providing them with the goods generated through the collected funds.

4. Budget Accounts: Retail giants, such as department stores, implement budget accounts as a method of credit sales. These establishments create individual accounts for approved customers, granting them the ability to purchase goods on credit. The customer’s account is debited for the purchases made. The accumulating balance is then settled later.

5. Charge Accounts: Similar to budget accounts, charge accounts are established by major retail stores to offer approved customers the opportunity to make credit purchases. These customers can buy goods on credit, and the store periodically issues statements detailing the amounts owed. Some stores even offer cash discounts as an incentive for prompt payments and the settlement of outstanding balances.

6. Trading Checks: Trading checks permit approved customers to borrow from participating companies within the check scheme. This method allows consumers to access short-term credit facilities for immediate purchases or financial needs.

7. Credit Trading: Retailers often offer credit trading services to customers, which allow them to make purchases on credit. Customers are charged an additional 5% on the value of the credit extended to them. This fee is compensation for the privilege of purchasing goods without immediate payment.

8. Club Trading: Club trading is the formation of a collective contribution where individuals contribute equally to a pool of funds. Members decide the sequence in which each member will receive goods equivalent to the total contribution of each period.

9. Mortgage: A mortgage is a credit system facilitated by a mortgage bank or institution that provides individuals with loans to acquire land or construct a house. The loan is secured by the property being purchased, which serves as collateral until the borrower repays the borrowed amount along with agreed-upon interest.

House Mortgage. Photo by Tierra Mallorca on Unsplash

Hire Purchase

Hire purchase is an installment payment system where a seller permits a buyer to possess a product on a hire basis following an initial deposit. The buyer gradually pays off the purchase price, typically in installments, eventually gaining full ownership of the product upon completing the payment schedule.

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Hire purchase is particularly common among Nigerian transport workers. It is an alternative method for them to acquire their cars, autorickshaws, and motorcycles for commercial uses.

For example, if Mr. Chinedu cannot afford to buy a motorcycle (Okada), he can go to Mr. Bala, a motorcycle dealer, for a hire purchase on the condition that he will pay him in installments according to a price set by Mr. Bala. The fixed price of the motorcycle is usually higher than its normal market value. So, for example, if the original price is four hundred thousand naira, the hire purchase price will be something around six hundred thousand naira to be paid across twelve months. If Mr. Chinedu defaults on his payment, Mr. Bala can seize the motorcycle since it is collateral.

A man in an autorickshaw (otherwise known as Keke Napep or Moruwa in some parts of Nigeria). Photo by Kojo Kwarteng on Unsplash

Advantages of Hire Purchase to the Seller

1. Increased Sales Volume: Hire purchase facilitates increased sales for the seller. By offering products through this system, the seller broadens the customer base and makes goods accessible to a larger audience. Moreover, this approach often allows the seller to raise the selling price.

2. Profit Amplification: The augmented selling price resulting from hire purchase directly contributes to increased profits for the seller. The extended payment plan encourages buyers to purchase higher-priced items, which can significantly enhance the seller’s bottom line.

3. Risk Mitigation: Hire purchase minimises the risk of bad debt for the seller. The goods themselves serve as collateral until the buyer completes the payment. This security reduces the likelihood of non-payment and safeguards the seller’s investment.

4. Amplified Production Demand: An increase in demand for goods, propelled by hire purchase availability, triggers a surge in production requirements. This heightened demand often necessitates an increase in production output.

5. Job Security and Production Stability: The surge in demand fueled by hire purchase arrangements ensures consistent demand for the products. This sustained demand creates a stable market for the seller’s goods. This will foster job security and maintain a steady pace of production to meet consumer needs.

Disadvantages of Hire Purchase to the Seller

1. Capital Tie-Up: Hire purchase is a significant capital investment from the seller. As goods are made available to buyers under this scheme, a considerable portion of the seller’s capital gets tied up in inventory, limiting flexibility for other investments or operational needs.

2. Repossession Challenges: Efforts to repossess goods due to default payments can lead to disputes and conflicts between the seller and the buyer. These disputes may disrupt the business and result in additional time and resources spent on legal proceedings.

3. Risk of Bad Debts: Hire purchase arrangements pose a risk of creating bad debts for the seller. If buyers default on payments, the seller faces financial losses as the goods were provided on credit, potentially resulting in the non-recovery of the owed amount.

4. Difficulty in Reselling Repossessed Goods: If goods are repossessed due to non-payment, the seller might encounter challenges in reselling these items. The condition or perceived value of the repossessed goods may have depreciated, making it challenging to recoup the initial investment upon resale.

5. Legal Entanglements: Instances of default in hire purchase agreements can escalate to legal disputes, leading to court cases that could disrupt the seller’s business operations. These legal proceedings not only consume time and resources but also create uncertainty in the business environment.

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6. Risk of Absconding Buyers: There’s a risk that buyers, especially in instances of default, may abscond with the goods acquired through hire purchase, leaving the seller at a loss without both payment and the merchandise.

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Advantages of Hire Purchase to the Buyer

1. Access to Products Without Full Payment: Hire purchase enables buyers to acquire and enjoy products without paying the entire purchase price upfront. This accessibility allows individuals to possess and utilise desired items immediately, spreading the cost over manageable installments.

2. Enhanced After-Sales Services: Buyers often receive additional after-sales services from the seller when purchasing through a hire purchase. This added support, such as warranties, maintenance, or technical assistance, contributes to a more satisfying ownership experience. This ensures proper care and maintenance of the purchased goods.

3. Encouragement of Saving Habits: A hire purchase encourages buyers to cultivate a habit of saving. To eventually own the durable goods being purchased, buyers need to commit to regular payments. A disciplined savings approach is thus required to meet the installment requirements.

4. Promotion of Prudent Spending: The structured payment plan inherent in hire purchases encourages responsible and prudent spending habits among buyers. It necessitates thoughtful budgeting to ensure consistent payments. It also discourages impulsive purchases and promotes financial planning.

5. Elevating Standard of Living: Hire purchase plays a role in elevating the standard of living for buyers. Access to durable goods through installment payments enables individuals or households to enhance their quality of life by acquiring items that might otherwise be financially out of reach.

6. Increased Accessibility for Low-Income Buyers: Hire purchase provides an opportunity for individuals with limited immediate financial means to access durable goods. This accessibility allows lower-income individuals to acquire essential or high-value items that might not be affordable through a lump-sum payment.

Disadvantages of Hire Purchase to the Buyer

1. Increased Total Cost of Purchase: Buyers opting for hire purchases end up paying more for the goods compared to what they would have paid if they purchased the item outright with cash. The additional interest or service charges accrued through installment payments inflate the overall cost.

2. Temptation to Overspend: The allure of acquiring goods through hire purchases might entice buyers to surpass their financial capabilities, which leads to the purchase of items beyond their means. This temptation to overspend can strain their budget and financial stability.

3. Accumulation of Debt Burden: Hire purchases can plunge buyers into substantial debt. Continuous installment payments, especially for multiple items purchased on credit, can accumulate, burdening the buyer with significant financial obligations.

4. Risk of Losing Goods and Installments: Buyers face the risk of losing both the purchased goods and any installments made if they fail to keep up with payment schedules. Repossession due to non-payment can result in losing both the item and the money already paid towards it.

5. Possibility of Inferior Products: Buyers may receive subpar or inferior products through hire purchase agreements. There’s a risk that sellers might provide lower-quality items, reducing the value or longevity of the goods acquired.

6. Limited Negotiation Leverage: Hire purchase terms often limit the buyer’s ability to negotiate favourable conditions. The predetermined terms and conditions of the installment plan may leave little room for negotiation, reducing the buyer’s ability to influence terms in their favour.

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7. Limited Choice Scope: Hire purchase arrangements can restrict the buyer’s options and choices. Since the purchase is based on a credit agreement, buyers may find themselves limited to the selection of goods or brands offered by sellers who facilitate hire purchase arrangements. This limitation diminishes the buyer’s freedom to explore a wider range of products or shop from various sellers and constrains their ability to find the most suitable item that aligns with their preferences or needs.

Payment with a VISA card. Photo by Clay Banks on Unsplash

Deferred Payment

Deferred payment is an installment payment method wherein the seller permits the buyer to gain complete possession and ownership of the product or service following an initial deposit. Unlike immediate cash purchases, this system allows buyers to take immediate possession of the item while paying the remaining balance in installments over an agreed-upon period.

Features of Deferred Payment

1. Ownership Upon Deposit: Upon making the initial deposit, the buyer gains complete ownership and possession of the product or service. This allows immediate use or utilisation of the purchased item.

2. Structured Payment Plan: The remaining balance is paid in installments, typically over a specified period. This structured payment schedule facilitates affordability for the buyer while enabling them to access desired goods or services.

3. Flexibility for Buyers: Deferred payment offers flexibility to buyers. It allows them to spread out the cost of high-value items or services. It makes these goods or services more accessible without the immediate financial burden of a lump-sum payment.

Comparison between Hire Purchase and Deferred Payment

1. Hire purchase involves goods considered “on hire” until the full payment, signifying temporary ownership by the buyer during the payment period. Conversely, deferred payment arrangements don’t designate goods as “on hire”; they imply direct ownership by the buyer from the outset of the purchase.

2. In hire purchase, ownership remains with the seller until the buyer completes the full payment, whereas in deferred payment, ownership transfers to the buyer after the initial deposit.

3. Hire purchase allows the seller to repossess goods in case of buyer default, whereas deferred payment generally doesn’t involve repossession rights for the seller.

4. In case of default, the seller in hire purchase can sue and repossess goods, while in deferred payment, legal action without repossession rights is possible.

5. Hire purchases often involve more durable goods suitable for larger, long-term purchases, while deferred payments typically cater to smaller, more immediate purchases involving less durable goods.

6. The advantage in hire purchase leans towards the seller’s interests due to retained ownership, while deferred payment tends to be more favourable to the buyer’s interests due to direct ownership and potentially more accessible purchases.

Conditional Sales

A conditional sale is an installment payment arrangement where the buyer obtains ownership rights to the product only upon fulfilling all the specified conditions of payment. In this system, the buyer does not gain immediate ownership upon the initial transaction; instead, ownership is contingent upon meeting the predetermined payment criteria.

Features of Conditional Sales

1. Ownership Conditionality: Unlike conventional purchases or some installment plans, conditional sales require buyers to fulfil specific conditions outlined in the agreement before gaining full ownership rights to the product.

2. Deferred Ownership: Until all conditions are met, the buyer does not have complete ownership of the product. This delayed ownership ensures that the buyer’s rights to the item are contingent upon meeting the stipulated payment terms.

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