Installment Trading
Installment trading means that payment for something over a certain periods in a number of installments.
The initial payments made by the buyer is called down payment
Advantages and disadvantages of installment trading
Traders
Advantages
Increase sales
More profits
Earn additional profit due to interest charged
Able to sell expensive goods
Can repossess the goods if sold under hire purchase
Disadvantages
Difficulty in collecting installments
Large capital to finance
Incur more expensive cost
Repossess article may be in poor conditions
Compelled to sell second hand goods
Customers
Advantages
Enjoy the use of goods while paying for them
Forced to save to pay installment
Can get better quality and more expensive goods
Guarantee after sale service
Doesn’t have to save full amount in order to get the goods
Disadvantages
Tempted to over buy
Buy things which he cannot really afford
High rate of interest
If the goods are repossessing, he will face big loss
Bound by the agreement signed
Type of installment trading
The two main types of installment trading are
1. Hire purchase 2. Deferred Payment
Payment
Hire purchase:- The buyer is require to make down payment and pay the balance in small installments
Deferred Payment:- The buyer is require to make down payment and pay the balance in small installments
Ownership
Hire purchase:- The buyer is ONLY considered as hire not a legal owner
Seller can reclaim the goods sold if the buyer fails to pay installment
Buyer is allowed to use the goods while paying
Deferred Payment:- The buyer considered as legal owner of good bought
If the buyer fails to pay installment, the seller has no right to reclaim the goods but they can sue the buyer
Interest
Hire purchase:- The buyer is required to pay more than the cost price of goods where the extra amount is called interest
Deferred Payment:-The buyer is required to pay more than the cost price of goods where the extra amount is called interest
Type of goods
Hire purchase:-Expensive and durable goods
Deferred Payment:-Expensive and durable goods but no second hand value
E.g. Gowns, Toys, Electrical Appliances
Differences between Hire Purchase and Deferred Payment
1. Hire Purchases allows the buyer to choose whether to buy the goods or not depending on his paying the final installment
where as
Deferred Payment is an actual sale
2. In hire purchases where the buyer doesn’t own the goods immediately. Therefore, ownership of the goods cannot be transferred until the final installment has been paid
where as
In Deferred Payment where the buyer owns the goods immediately. Therefore, he can dispose of the goods whenever he wishes
3.In hire purchases where if the buyer fails to pay the installments, the seller can take possession of the goods
where as
In Deferred Payment where if the buyer fails to pay the installments, the seller cannot reclaim the goods but can sue the buyer for the debts
4. Hire purchase is suitable for goods with good resale value
where as
In Deferred Payment where it is suitable for goods with low resale value
How to calculate?
Example 1:
The cash price of a computer is $2,000. Sale terms are $500 cash deposit and 12 monthly payments of $150. Calculate the credit charge?
Working:
Step 1: 12 X $150 = $1,800
Step 2: $500 + $1,800 = $2,300
Step 3: $2,300 - $2,000 = $300
Example 2;
Heliza wishes to buy a brand new car. The cash price of the new car is $20,000. She can only afford to buy the car on hire purchase with down payment of 10% of the cash price and 48 monthly installment of $500. Calculate
a) the down payment
b) total monthly installment
c) total hire purchase cost
d) the interest charge
Working:
a) $20,000 X 10% = $2,000
b) 48 X $500 = $24,000
c) $2,000 + $24,000 = $26,000
d) $26,000 - $20,000 = $6,000
Satisfactory
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