Credit: Hire Purchase, Mortgages, Leases and rentals, Loans and Overdrafts, Credit Instruments

CONTENT

• Hire Purchase
• Mortgages
• Leases/rentals
• Loans and overdrafts
• Credit Instruments

Hire Purchase

This is a credit arrangement whereby the seller allows the buyer to take possessions of goods on hire basis after making an initial deposit to be followed by a number of specified regular installments at the end of which he becomes the owner of the goods involved. Even though the buyer (i. e the hirer) obtains immediate possession of the goods by paying the initial deposit demanded by the seller, the goods will continue to be on hire and the buyer does not become the owner until he has paid the final installments

A hire purchase agreement is suitable for durable goods such as Motor Vehicles, Furniture, Refrigerators, electronics, washing machines, machinery etc. since these have a resale value in case the hirer (buyer) fails to pay the installments.

If the hirer (the buyer) defaults in payment of any of the installments the seller may reposses the goods. The buyer (hirer) has no power to sell or pledge the goods without the consent of the owner (seller) during the time the goods are on hire.

The hire purchase agreement may be financed under any of the following arrangements.

1.         Private arrangement – by the buyer (hirer) himself .i.e. the agreement is only between the seller and the buyer

2.         Multilateral arrangement – here the agreement is between the seller, a finance company, the buyer (hirer) and the guarantor of the buyer

Features of Hire Purchase

i.          Initial deposit

ii.          Installment payments

iii.         It involves durable goods

iv.         The goods are on hire

v.         Ownership of the goods remains with the seller; the buyer will not become the owner of the goods until he pays the final installment

vi.         The seller usually charges interest on the amount yet to be paid by the buyer therefore the Hire purchase price is always more than the cash price

vii.        If the buyer (hirer) default in paying any of the installment the seller will reposes the goods

viii.       The buyer (hirer) cannot sell, destroy, damage, exchange or pledge the goods as security for a loan until he pays the final installment

ix.         Bad dept is rare due to

            a.         Repossession

            b.         Insurance of the goods by the seller

x.         Cash discount is not given to the buyer

EFFECTS OF HIRE PURCHASE ON THE SELLER

a.         Quick turnover (Sales)

b.         It ties down the seller’s capital

c.          The seller makes more profit

d.         The seller runs the risk of accumulating damaged goods

e.         It involves additional record keeping .i.e. book-keeping

f.          Changes in the law or government regulation on hire purchase may affect the seller’s operations

EFFECTS OF HIRE PURCHASE ON THE BUYER

a.         He is encouraged to save

b.         He enjoys the use of goods not fully paid for

c.          He can  terminate the contract (i.e. hire purchase agreement) and return the goods

d.         He could lose both the money paid and the goods if he defaults

e          He cannot sell or transfer the goods during the period of payment

ADVANTAGES OF HIRE PURCHASE TO THE SELLER

i.          It increases his turnover (or Sales)

ii.          It increases his profits as he sells at higher prices i.e. he earns high interest rates

iii.         It enables the seller to dispose off expensive durable goods quickly

iv.         The seller increases his selling price

v.         Bad debt cannot occur as the seller can reposes the goods if the buyer defaults

DISADVANTAGES OF HIRE PURCHASE TO THE SELLER

i.          It ties down a lot of the seller’s capital

ii.          The seller requires large capital to be able to operate well

iii.         It involves additional cost in respect of record – keeping and collection of installments

iv.         The seller runs risk of accumulating damaged second-hand products

v.         The seller may find it difficult to resell repossessed goods.

EVALUATION QUESTIONS

1.         State eight features of Hire Purchase

2.         State five disadvantages of Hire Purchases to the Seller

3.         State five effects of Hire Purchase on the buyer

ADVANTAGES OF HIRE PURCHASE TO THE BUYER

1.         He enjoys the use of the goods before he has paid for them

2.         He is encouraged to save in order to pay the installments

3.         He can at any time terminate hiring and return the goods

4.         The seller renders more after – sales services in respect of the goods

5.         He can obtain expensive goods when he could not have afford otherwise

DISADVANTAGES OF HIRE PURCHASE TO THE BUYER

1.         Goods are more expensive under hire purchase compared to cash purchase

2.         Buyers may be tempted to buy more than he can afford and thus accumulate great debt

3.         The buyer may lose the goods and all the installments of the goods

4.         The buyer cannot sell or transfer the goods until he has paid fully for it.

5.         It reduces scope of choice of the buyer since not all sellers on hire purchase

MORTGAGES: This is a special type of credit system whereby a mortgage bank, building society, savings and loans company gives a loan to an individual or business for the purpose of building a house or purchasing a piece of land. The loan borrower (the mortgagor) uses the land or building he has built or purchases with the loan as a security with the bank or building society (the mortgagee). Mortgages are repaid installmentally and are usually long-time in nature.

LEASES/RENTALS: Under lease arrangement a party (lessee) is allowed to make use of an item while making regular payments (rentals) to the owner (lessor). There are two types of lease.

a.         Finance Lease: Here the ownership of the asset will be transferred to the lessee after the expiration of the lease agreement.

b.         Operating Lease: The asset remains the property of the lessor after the expiration of the lease agreement.

Rental and lease are similar except the rentals are for a very short time while leases are for a long time.

LOAN AND OVERDRAFT: Loans may be obtained from banks or finance houses to set up new business or expand existing ones.

However, overdrafts are usually granted by banks to current account operators to meet immediate commitment. The bank will charge interest on loans and overdrafts granted to their customers.

CREDIT INSTRUMENT

These are written documents through which credit is granted or through which repayments are made on account of credit transactions. They include

1.         Bill of exchange

2.         Money order

3.         Bank drafts

4.         Cheques

5.         Promissory Notes

6.         Credit Cards

7.         Letter of Credit

8.         Debentures

9.         Bonds

10.       I. O. U

EVALUATION QUESTION

1.         State seven differences between Hire Purchase and Deferred Payment

2.         Explain the following types of credit

            (a) Mortgage (b) Loan and overdraft

3.         Messrs Ola and Musa are both traders:

Ola trades on cash basis only while Musa allows credit. Give four reasons each whay Ola insists on cash payment and Musa allows credit Sales.

GENERAL EVALUATION/REVISION QUESTIONS

1. State five effects of hire purchase on the seller
2. List five advantages of hire purchase to the seller
3. Explain seven factors that should be considered in siting a small retail shop
4. State and explain five problems likely to be faced by a businessman who wants to sell his goods overseas
5. What five benefits does Nigeria derive from engaging in international trade            

READING ASSIGNMENT

1.         Essential Commerce SSS by O. A. Longe Page 120 – 127

2.         Comprehensive commerce for SSS by J. U. Anyaeli Page 182 – 189

WEEKEND ASSIGNMENT

1.         Which of the following is not suitable for hire purchase (a) Textile (b) Furniture (c) Refrigerators (d) Printing Machine

2.         What is defined as an arrangement to pay an initial deposit for an object and then pay the balance in regular installments while having the use of the object (a) Conditional Sales (b) Credit Sales (c) Hire Purchase (d) Leasing

3.         Credit in business transaction is a (a) Means of saving money (b) Rebate for large purchases (c) Form of Loan (d) Prepayment by customers

4.         Which of the following is not true of hire purchase (a) Buyer pays more than the normal price of goods (b) Seller can reposes the goods if buyer defaults (c) Seller makes high turnover on each item sold (d) Buyer becomes the owner of the goods as he takes possession

5.         A contract of sale where ownership passes to the buyer on the payment of the first installment is known as (a) Hire Purchase (b) Lease (c) Cash on delivery (d) Credit Sale

THEORY

1.         List three goods that can be sold on hire purchase

2.         State two advantages of Hire Purchase to the seller