- Credit sales (extended credit/deferred payment): the customer becomes owner of the goods immediately after signing an agreement to pay at an agreed future date.
- Hire purchase: goods are hired to the buyer after an initial deposit, with the remaining amount plus interest paid in equal instalments. The buyer only takes ownership after the final instalment, though they take possession after the deposit. Once a third of the hire purchase price is paid, the seller can only recover the goods through court action.
- Conditional sales agreement: combines elements of credit sales and hire purchase — the seller remains the owner of the goods until the last instalment is paid.
- Revolving credit: the debtor can always take goods on credit, provided they don’t exceed a specified maximum amount.
- Informal credit: given by small-scale retailers to trustworthy customers, with no written document or collateral required.
- Credit card: issued by banks or financial institutions to creditworthy customers, allowing them to buy goods on credit or withdraw cash from ATMs up to a set limit.
- Book me down: a customer buys goods from a nearby retailer and promises to pay within a specific period, often recorded informally.
Worked Example: Hire Purchase
An article is sold at 250,000frs. It is bought on hire purchase with a deposit of 50,000frs and the rest paid in 30 instalments of 8,000frs.
Hire purchase price = deposit + total instalments = 50,000 + (8,000 × 30) = 50,000 + 240,000 = 290,000frs.
Interest = hire purchase price − cost of goods = 290,000 − 250,000 = 40,000frs.
If the instalment is instead reduced to 5,000frs over 50 instalments: hire purchase price = 50,000 + (5,000 × 50) = 300,000frs, with interest of 300,000 − 250,000 = 50,000frs.
Advantages of Hire Purchase
The seller can repossess the goods if needed, increases sales, retains ownership until full payment, and earns interest. The buyer enjoys the good before full payment, can afford goods above their immediate income, may return goods before completing payment, and gains if prices rise during inflation.
Disadvantages of Hire Purchase
The customer’s bargaining power is restricted, they can’t always choose freely, they pay a higher overall price, and the instalments reduce their disposable income and standard of living.
