Answer:
Explanation:
Hire purchase is a financial agreement that allows you to buy an item, such as a car or furniture, by making regular payments over a fixed period of time. It is a type of installment plan where you can use the item while paying for it.
Here's how hire purchase works:
1. Select the item: First, you choose the item you want to purchase, such as a car or appliance.
2. Deposit or down payment: You may need to pay a deposit or down payment upfront. This amount is usually a percentage of the total cost of the item.
3. Installment payments: After paying the deposit, you make regular installment payments over a set period, typically monthly. These payments include both the cost of the item and any interest charges.
4. Ownership transfer: While you are making the payments, you do not technically own the item. Ownership is transferred to you once you have completed all the payments, including any additional fees or charges.
5. Interest rates: Hire purchase agreements often include interest charges, which are added to the cost of the item. The interest rate can vary depending on factors such as the price of the item, the length of the agreement, and your credit history.
6. Early settlement: In some cases, you may have the option to settle the agreement early by paying off the remaining balance. This can help you save on interest charges, but you should check the terms and conditions of your hire purchase agreement to see if this is allowed and if any penalties apply.
Here's an example to illustrate how hire purchase works:
Let's say you want to buy a car that costs $20,000. You pay a deposit of $4,000 upfront, leaving a balance of $16,000. The hire purchase agreement is for a period of 3 years, and the interest rate is 5% per year.
You would then make monthly installment payments, which would include the cost of the car ($16,000) plus the interest charges ($16,000 * 0.05 = $800 per year or $800 / 12 = $66.67 per month). Over the 3-year period, you would make a total of 36 payments.
Once you have made all the payments, including the interest charges, ownership of the car would be transferred to you.
It's important to carefully read and understand the terms and conditions of any hire purchase agreement before entering into it. This will help you make an informed decision and avoid any surprises or hidden costs.