Give the merits and demerits of hire-purcahse and instalment purchase system.

1. People with limited means can purchase and enjoy costly articles. They can pay through easy instalments out of future earnings. In this way common man can improve his standard of living.

2. The system encourages thrift or saving among buyers. They remain under an obligation to pay instalments regularly after taking possession of the article.

3. Hire-purchase system is a useful device to push up the sales of costly articles. Due to the facility of credit and easy instalments, large number of customers can be attracted to purchase the goods. Mass selling encourages mass production.

4. Hire-purchase system is a boon to small-scale industries and farmers. They can purchase machinery and equipment on instalment basis and need not delay operations for want of funds. They can make payment in instalments out of the earnings from the use of machines and implements.

5. By purchasing goods on hire-purchase basis, well-to-do people can invest their surplus money in more profitable avenue. The seller can obtain loans against the goods sold one hire-purchase basis. At present, banks and finance companies help the hire-purchase sellers by providing finance and collection services. Hire-purchase business help to increase production, employment and national income in the country.

Demerits : The main drawbacks of hire-purchase are as follows :

1. It encourages prodigal expenditure and induces people to live beyond means. People with small means are tempted to purchase luxury products which they cannot afford. In order to pay instalments regularly they have to curtail their expenditure on the necessities of life. People have to mortgage their future income.

2. Prices under hire-purchase are high as the seller charges interest on unpaid amount. He also adds some margin for bad debt risk and collection charges. Many buyers are under severe strain to save compulsorily to pay instalments. Some of them cannot bear the burden and they have to surrender the goods at a later stage.

3. Sellers have to bear a high risk. In case of default in payment, they have the right to take back the goods but the recovered secondhand goods may not fetch sufficient prices’. Under instalment system, the seller has to waste time, money effort to take legal action for the recovery of payment from the defaulter.

4. Hire-purchase facility is available only to people with regular and sufficient income. The vendors do not sell goods on hire-purchase to people with uncertain or fluctuating income and to those having no security to offer for the goods purchased.

5. Large amount of capital investment is required to carry on hire-purchase business. A large part of investment remains locked up in book debts.