Hire Purchase

Hire Purchase
Hire purchase is the mode of financing the price of the
goods to be sold on future date. In a hire purchase
transaction, the goods are let on hire, the purchase price is
to be paid in instalments and hirer is allowed an option to
purchase the goods by paying all the instalments.

In a hire purchase transaction the goods are let out on hire

by a finance company to the hirer .The buyer is required to
pay an agreed amount in periodical instalments during a
given period. The ownership of the property remains with
creditor and passes on to hirer on the payment of the last
instalment.
 Definition: Hire Purchase
According to the Hire Purchase Act of 1972 , The term
Hire Purchase can be defined as an agreement under
which goods are let on hire and under which the hirer has
an option to purchase them in accordance with the terms
of agreement, and it includes;
1. Possession of goods is delivered by the owner thereof to a
person on the condition that such person pays the agreed
amount in periodic payments.
2. The property of the goods is to pass such a person on the
payment of last of such instalment.
3. Such a person has a right to terminate the agreement any
time before the property so passes.
 Features
Hire purchase is based on an agreement in
writing.
The buyer takes possession of the goods at the
time of entering into contract.
Each instalment is treated as hire charges.
Ownership transfer from buyer to seller on the
payment of last instalment.
The purchaser has the right to terminate the
agreement any time before the property passes.
 Feature of Hire Purchase
Equipment Supplier Hire Purchase (Finance)
CompanyHirer/Hire purcahser(down payment
20-25%on cost of equipment) +balance in EMI in
advance or arrears over 36-48 months
 Hire Purchase Agreement
THE HP AGREEMENT
The HP agreement must have the following information:
Description of motor vehicle;
Computation of the total sum payable;
Minimum deposit;
Term charges and annual percentage rate for term charges;
Late payment charges;
Date on which hiring commences;
Number of instalment repayments;
Amount of each instalment repayment;
Person to whom repayments are to be made, time and
place of repayments; and
Address where the motor vehicle is to be kept.
 Hire-Purchase Agreement
Seller
Financier
Hirer
Process:
Dealer Financier Contracts Customer
selects goods desired Preparation of documents
for Hire Purchase Agreement by financier Down
payment to dealer documents sent to Finance
Company Acceptance by finance company
payment of installments Transfer of ownership
on last instalment
Essentials of hire purchase
agreement
 Rights
Hirer:
The hirer should have the right to complete the purchase of
the goods by paying or tendering to the owner the hire-
purchase price or the balance left after paying off the
installments.
The hirer should have the right to terminate the agreement at
whatever time the hirer thinks fit. After termination of the
Hire-purchase agreement, it is the duty of the hirer to re-
deliver the goods to the owner.
 Rights
owner in a Hire-purchase agreement
The owner should have the right to terminate the hire-
purchase agreement in cases of default in payment by the
hirer or unauthorized use of the goods under the Hire-
purchase agreement.
On termination of a Hire-purchase agreement, the owner
should have the right to retain the hire which has already
been paid and to recover the arrears of hire due
 Hire Purchase Vs Credit Sales
CREDIT SALE (CS)
Consumer Protection (Credit
Governing Law
Sale) Regulations 2012
Seller, Purchaser and Credit
Parties Facility Provider (which can also (Purchaser) and Finance
be the Seller)
as soon as the credit sale
Ownership of Goods
agreement is made.
No deposit required to be paid
Deposit
by the purchaser.
Early Settlement Allowed. Rebate to the
purchaser.
Right to Repossess No
HIRE PURCHASE (HP)
Hire Purchase Act 1967
Dealer (Seller), Hirer
Company (Owner)
Immediate delivery of the
goods but ownership
remains in the finance
company
A hirer must pay a deposit of
at least 10% of the cash
price of the goods.
Allowed. Net balance due
under the agreement.
If payment of instalments
amounts to not more than
seventy
 Lease Vs Instalment Sale
Instalment Sale
Nature A method of sale,
Installment sales require the buyer
to make regular payments, or
installments, on an annual basis,
plus interest if
installment payments
Ownership of transfers to the user at starting of
the asset the installment period
BALANCE asset appears on the asset side of
SHEET the balance sheet and a
APPEARANCE corresponding liability against such
asset appears on the liability side.
DURATION short periods and for assets like
light moving vehicles, electrical
items, small machinery etc.
Lease
lease financing is a type of
rental contract with a purchase
option between the two
parties.
lessee has to transfer the asset
to the lessor after the end of
the lease period and the lessee
has an option to purchase or
not to purchase the asset.
the value of the asset is not
included in the financial
statements since the lessee is
not the owner
longer periods and for assets
like land, property, heavy
vehicles and huge plant and
machinery
 Lease Vs Instalment Sale
Instalment Sale Lease
MAINTENANCE User FL: Lessee
SUPPORT OF THE OL: Lessor
ASSET
REDUCED INITIAL Down payment +Installment Periodic Rentals
CASH OUTLAY
 HIRE PURCHASE Vs Instalment sale
Hire purchase Instalment Sale
Owner transferred only on Ownership is transferred to
the payment of last the buyer(Contract of sale) on
instalment/specified number initial payment
of instalments

Call Option and Right of The buyer is committed to pay

termination the full price
Difference between leasing and Hire-
purchase
Difference between Leasing and hire purchase
contd..
CHARACTERISTICS LEASE HP FINANCING
Transferred to hirer on the
Ownership The lessor
payment of last instalment
Capitalization Books of lessor Books of hirer
Salvage value lessor Hirer
High cost assets like Low cost assets office
Magnitude
machinery ,ships and aircraft equipments,automobiles
Down payment Not required 20-25
Maintenance of asset Depending on lease By hirer
Suitability Capital intensive Low capital intensive
Nature of asset Fixed assets inventory or as receivables
Lease rental is shown as Interest portion in PL of
Receipts
income vendor
 Banks and Higher purchase
Notification issued in 1990 of section 6 of the
Banking Regulation Act, 1949.
Subsidiary
Guideline:
Share holding portion
exclusively or together with the business of
equipment leasing
A bank shall not enter into leasing agreement with
another equipment leasing company and other non-
banking finance company engaged in equipment
leasing.
 BANK CREDIT FOR HIRE PURCHASE BUSINESS

The subsidiaries of commercial banks lend to the dealer

to finance intermediary who has already financed vehicles sold by
the dealer to the hirer
take extra precautions
standing and financial position of the dealer or of the hire-purchase
company
principles of lending
1. Customer credit worthiness and repayment capacity
2. Purpose for which it is done
3. Amount involved
4. Period
5. Repayments are evenly spread
6. Security against hypothecation
7. Monitoring and control
 Outright purchase
Outright purchase is the transaction whereby the property
or goods in question is entirely purchased at once with
complete rights on payment of full consideration and
without any reservation or qualification.

Example: Pay full price of say, Rs. 5lac and take the delivery
of car, as against the Car purchased with bank finance with
hypothecation charge registered. Any item purchsed under
Hire-purchase or Instalment purchase is not an outright
purchase.
 Problems in Outright purchase
High initial cost -affect cash-flow
Technology obsolescence
Maintenance & repair cost
wont be able to take advantage of the tax
benefits [like lease rental and loan interest
payment]
Hire purchase problem