DEPARTMENT OF BANKING AND FINANCE

SCHOOL OF MANAGEMENT STUDIES

NUHU BAMALLI POLYTECHNIC, ZARIA

P.M.B 1061, ZARIA

ASSIGNMENT ON:

By:

QUESTIONS
What is hire Purchase?
What is bill of exchange?

NOVEMBER, 2022
Introduction

Hire purchase refers to the arrangement made mostly between two parties in which one party wants
to buy some expensive asset by paying the amount in various installments and therefore, it is a kind
of arrangement where the purchaser agrees to pay some amount (known as a down payment) to the
supplier at the time of purchase and the balance amount is paid in various installments along with the
interest that is charged at some fixed percentage.

What is Hire Purchase?

Hire purchase is an arrangement for buying expensive consumer goods, where the buyer makes
an initial down payment and pays the balance plus interest in installments.

Hire purchase means a transaction where goods are purchased and sold on the terms that:

 Payment will be made in installments

 The possession of the goods is given to the buyer immediately
 The property (ownership) in the goods remains with the vendor till the last installment is
paid,
 The seller can repossess the goods in case of default in payment of any instalment, and
 Each installment is treated as hire charges till the last installment is paid.

Explanation

In hire purchase agreement there are two parties where one is the seller of the asset and one is the
person who wants to buy such asset. In the arrangement of hire purchase both the parties mutually
agrees to enter into a contract in which the purchaser is supposed to pay the initial down payment at
the time when the delivery of asset is made and the remaining amount is paid in certain installment
along with the interest. The delivery of goods in such case is made at the time of paying initial down
payment but the ownership of the asset get transferred to the customer only when the customer pay
off all the dues to the vendor. If the customer fails to repay installments then the supplier has the
right to get back the possession of that asset.

IMPORTANT OF HIRE PURCHASE

Hire Purchase is one of the most commonly used modes of financing for acquiring various assets. It
aids by spreading the huge cost of an asset over a longer period of time. Thus, it frees a lot of capital
to be directed to other important purposes.

The most obvious important for a company in using a hire purchase plan is it does not have to pay
the full amount of the purchase up front. This can be very beneficial for a company that needs to
obtain expensive equipment but does not have the necessary capital and does not want to increase its
debt burden by borrowing money. Companies can sometimes manage to keep the money used to
lease the equipment and the equipment off their balance sheets, thereby providing better-
looking return on assets (ROA) ratios.

Another financial important of using a hire purchase plan is such plans often include maintenance in
the contract, so the company does not have to worry about having to pay for any expensive repair
costs that may arise. Expensing the rental payments may be more tax advantageous than buying and
depreciating the equipment. A hire purchase plan is also beneficial in that it does not obligate the

1
company to keep the equipment, and payment terms are often flexible. For example, if the use of the
equipment varies seasonally, payments can often be structured to coincide with the level of usage.

TYPES OF HIRE PURCHASE

Types are provided and discussed as below-.

 Consumer Hire Purchase: In this type, the goods are hired by the buyer for non-business
purposes i.e. for his personal use. This can also be for family or other household purposes
apart from the business. The hirer here is not the business but the natural person.

 Industrial Hire Purchase: Contrary to the above, here, the hirer is not the natural personal
but the companies or the industries that take the goods on hire for their business purposes.
Example: the hire purchase of machineries for the use in industries.

FUNCTIONS OF HIRE PURCHASE

 Hire purchase agreements usually prove to be more expensive in the long run than purchasing
an item outright.

 Hire purchase agreements usually prove to be more expensive in the long run than purchasing
an item outright.

 The hire purchaser becomes the owner of the asset after paying the last installment.

 Every installment is treated as hire charge for using the asset.

 Hire purchaser can use the asset right after making the agreement with the hire vendor.

ADVANTAGES OF HIRE PURCHASE

The various advantages of hire purchase are listed below:

Ease of Payment

As the payment has to be made in installments; it automatically turns out to be a boon for the buyer,
as it does not upset his routine living nor his current cash flow. This is the biggest advantage for the
people having a limited income.

Market Expansion

Hire purchase allows the customers to use expensive items or products without making the full
payment. So, it attracts more potential customers which helps the seller to expand the market.

Increase in the Profits

As there is increase in the volume of sales; this will eventually lead to increase in the profits.

Financial Benefits:

As the installments are paid in smaller amounts, the expenditure is known beforehand so the surplus
cash can be used by the buyer for other investments.

2
 DISADVANTAGES OF HIRE PURCHASE

If there are advantages associated with hire purchase, on the flip side, there are some disadvantages
too. Let us understand them:

Higher Interest Rate and Cost

The buyer has to pay higher amount of interest along with the principal amount while he is making
the repayment through installments. Thus, he will end up paying the amount more than the actual one
of the Asset or Property. Hence, hire purchase agreements tend to be more expensive in the long run.

Longer Payment Duration

The payments are usually extended over a longer period which will be tiresome and frustrating,
keeping you under stress. Hence, if the duration is for something like car, it makes sense, but for
other purchases, you really need to think whether there is any benefit in such long duration or not.

Artificial Demand

This system creates an artificial demand for the product. Even though the buyer cannot afford or may
not need to buy the product, he is tempted to do so.

Higher Risk for Hiree

For the seller it is a risk under such a system. Though he has the right to take that the Asset or
Property from the hiree, the second-hand goods fetches lesser price than the actual cost. Again, if
repossessed, it may come with defects needing repairs.

For hiree, there is a risk of loss or usage of the Asset if the buyer fails to pay the installment.

Effect on Credit Score

The hire purchase agreement is generally reported to major credit reporting bureaus. Even if the
buyer fails to make a single payment, this will be reported.

This can affect the credit score of the buyer and his ability to buy another thing on hire purchase in
the coming days

Ownership at the End for Buyers

Even after a fair amount of payment is done; the asset is still not his property till full payment with
interest is made. Therefore, the vendor has right to seize the asset in case the buyer fails to pay the
installment.

Meaning of bill of exchange

According to the Negotiable Instruments Act 1881, a bill of exchange is defined as “an
instrument in writing containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or to the order of a certain person or
to the bearer of the instrument”.

Features of Bill of Exchange

3
  It is important to have a bill of exchange in writing
 It must contain a confirm order to make a payment and not just the request
 The order should not have any condition
 The bill of exchange amount should be definite
 Fixed date for the amount to be paid
 The bill must be signed by both the drawee and the drawer
 The amount stated on the bill should be paid on-demand or on the expiry of a fixed
time
 The amount is paid to the beneficiary of the bill, specific person, or against a definite
order

Types of Bill of Exchange

 Documentary Bill- In this, the bill of exchange is supported by the relevant

documents that confirm the genuineness of sale or transaction that took place
between the seller and buyer.
 Demand Bill- This bill is payable when it demanded. The bill does not have a fixed
date of payment, therefore, the bill has to be cleared whenever presented.
 Usance Bill- It is a time-bound bill which means the payment has to be made within
the given time period and time.
 Inland Bill- An Inland bill is payable only in one country and not in any other
foreign country. This bill is opposite to the foreign bill.
 Clean Bill- This bill does not have any proof of a document, so the interest is
comparatively higher than the other bills.
 Foreign Bill- A bill that can be paid outside India is termed as a foreign bill. Two
examples of a foreign bill are an export bill and import bill.
 Accommodation Bill- A bill that is sponsored, drawn, accepted without any
condition is known as an accommodation bill.
 Trade Bill- This kind of bill is specially related only to trade.
 Supply Bill- The bill that is withdrawn by the supplier or contractor from the
government department is known as the supply bill.

Advantages of Bill of Exchange

 Legal Document- It is a legal document, and if the drawee fails to make the
payment, it will be easier for the drawer to recover the amount legally.
 Discounting Facility- In cases where the drawer is in immediate need of money, the
bill can be converted into cash by discounting it from a bank by paying some
nominal charges.
 Endorsement Possible- This bill of exchange can be exchanged from one individual
to another for the adjustment of the debt.

4
Conclusion

In Conclusion, Hire Purchase (HP) agreement is made when the buyer of the expensive asset is
unable to pay the full selling price of the asset at a single point of time, therefore, with the consent of
vendor buyer agrees to pay some initial down payment at the time of delivery of asset and the
remaining amount is paid in installments along with the interest. The vendor earns the interest
income also besides the profit margins on such transactions and the buyer gets the benefit to use the
asset without paying full amount at once. Thus, hire purchase also helps a nation’s economy to grow
further. However, before entering an agreement, one should clearly understand the costs involved
and the disclosures provided. 

Hire Purchase is an important source of financing in recent times. It provides a convenient way to
afford and acquire assets that otherwise be financially unattainable. Thus, hire purchase also helps a
nation’s economy to grow further. However, before entering an agreement, one should clearly
understand the costs involved and the disclosures provided. 

References

Staff, Investopedia (2010-07-14). "Hire Purchase". Investopedia. Retrieved 2018-02-25.

 Systems Engineering Fundamentals. Archived 2007-09-27 at the Wayback Machine Defense

Acquisition University Press, 2001

Salam, M. A. (2007), Social responsibility in purchasing: the case of Thailand, International Journal
of Procurement Management, vol. 1, issue 1/2, 97-116, accessed 27 January 2021. Salam
refers to CSR in a purchasing context as "purchasing social responsibility" (PSR).

Fearon, H E (1988) Purchasing Organisational Relationships, NAPM, Inc., Tempe, Ariz.

International Trade Centre (2000) Module 1: Understanding the Corporate Environment,

International Purchasing & Supply Management Modular Learning System, UNCTAD/WTO.