The concept of buying and selling has been in practice for years now. Starting from the barter system, the transaction, buying, and possession of goods have all evolved to a great extent. As time progressed, the desire to live with material goods has increased much among people.
The market ecosystem facilitates both the consumers and the buyers to attain their dream of possessing various assets through the two most important agreements, and those agreements are sales and hire-purchase agreements.
Now before we get into the difference between these agreements, we have to first understand the respective definitions of sale and hire purchase.
What can be defined as a Sale?
The act of sale involves two parties i.e., a seller and a buyer, here the buyer becomes a possessor and owner of goods by paying the full amount to the seller.
For example, when a buyer wants to buy an apartment worth 5 lakh, he/she can pay the entire amount to the seller and become the owner of the house. In such cases, the seller can no longer intervene once the complete transaction is made.
What can be defined as a hire purchase?
We people are always in need of expensive products, as we all like to live a comfortable life. Not all of us can buy expensive products that are available in the market these days.
That’s the reason why the hire-purchase agreement became a popular method of buying an asset. This method of paying for goods, allows the buyer (hirer) to possess the good by making an initial down payment and paying the rest of the amount in installments.
Usually, the down payment consists of a quarter of the original price of the product. The hire purchase agreement usually involves a seller, a financier, and a buyer.
In most cases, the financier is usually a bank representative arranged by the seller, and the representative acts as a middleman between the seller and the hire purchaser.
In some cases, the transaction can also happen directly between the seller and the hire purchaser. Apart from common people, this method of purchase is also suitable for corporate companies and small-scale industries, as they can make bulk purchases for their businesses with a small down payment.
Points To Be Remembered
- It’s always good to assess your financial ability before making a purchase.
- Read through the agreement documents thoroughly.
- If a financier is involved as a middleman, check with that particular bank to know about its installment policy.
- Ensure that the transactions are transparent throughout the entire process.
Difference Between Sale and Hire Purchase Agreement
Now that we have the basic understanding of sale and hire-purchase, let’s look deeper into that subject. While both the methods involve a similar act of selling and buying, there are 10 important differences between sales and hire-purchase agreements that can help us understand its working system better.
Ownership
Using the sale agreement, the ownership is transferred to the buyer immediately after the sale, as the transaction between seller and buyer ends then and there.
Unlike sales, the ownership is not transferred to the hire purchaser immediately. The seller retains ownership of the product until the installments are paid in full. Meanwhile, the hire purchaser can still possess the goods and enjoy its benefits by not paying the full amount.
Payment mode
When a buyer buys a product, he/she can make a full payment through cash, cheque, or other online payment methods.
Assets such as land, houses, and cars are usually brought under the hire purchase agreement. The hirer cannot pay the installments through cash as the installments may span over months or years. So the online payment method is followed everywhere as it is a convenient method for both parties to acknowledge the payment done for the product.
Interest payment
Since the buyer pays the amount in full immediately there is no interest amount paid along with it. On the other hand, the seller adds an interest amount to the hire purchaser for paying the amount in installments.
The interest-added amount is usually much higher than the original amount of the product yet hire purchasers are keener on acquiring the goods immediately by paying a small down payment.
Through this, both the buyer and hire purchasers are benefitted as the buyer can make extra money out of selling a product, and the hire purchaser can possess the goods immediately.
Risk of insolvent buyers
In the hire-purchase model, if the buyer is insolvent and cannot pay the amount in full, the seller has to bear the loss for the product. The vendors can confiscate the products from the hire purchasers for their insolvency.
Theoretically, it may sound easy, but in reality, there are legal actions taken by both the seller and hire purchaser if the seller wants to take away the product
Reselling rights
The buyer can resell the products to anybody since he/she is entitled to be the owners of the assets on paying the full amount.
Hire purchasers don’t have such rights as they do not have the ownership of the products bought.
So, in terms of reselling rights, we can say that the sale-purchase agreement allows it, whereas it is not allowed when a hire-purchase agreement is in place between the seller and the buyer.
Terminating the contract
In the sale-purchase agreement, the buyer cannot terminate the contract with the seller as both the parties have agreed to complete the transaction and transfer of ownership happens immediately.
The transaction between vendor and hire purchaser is contractual. Therefore, either party can terminate the contract if there are defaults in adhering to the contract. In such a case, the hire purchaser can return the goods without having to pay the rest of the installments.
Repairing the goods
In the sales purchase agreement, once the goods get sold to the buyer and if there is no warranty, then the liability of repair is handled by the buyer.
In the case of hire purchasers, in most cases, they can take the goods back to the vendors for repair since the ownership entitlement lies with the vendors
Increased demand for assets
Sales agreements usually don’t promote demand even if the majority of the transactions happen by using this type of agreement.
On the other hand, the hire-purchase agreement encourages the demand for assets amongst the moderate to the low-income population. It gives them the opportunity to possess the goods and pay for them later on.
Affordability
Hire purchase agreement allows middle-class people to afford expensive goods, even when they don’t have immediate buying power. On the other hand, a sale agreement doesn’t encourage affordability amongst people with less income.
Conclusion
By pointing out the differences between sales and hire purchase agreements, it is evident that they both have their own pros and cons.
Some buyers may find that buying products on spot by providing full complete payment to the seller is the best option, as they don’t have to pay any extra amount over the original price.
They also deem it to be a safer option, when compared to the hire purchase method where the ownership is retained by the seller or financier.
There are also people who choose the hire purchase method as it seems to be an easier option to lead a comfortable life. It gives them a choice to settle for quality products instead of settling for cheaper products with low quality.
But the major disadvantage with the hire purchase method is that many people spread themselves too thin by purchasing a lot of products through installments.
It only adds up to their financial burden thereby making them incapable of making payments on time.
Having pointed out the major differences, advantages, and disadvantages between sales and hire purchase, one can take a proper decision to choose the method that best suits them.