Hire Purchase

Evolution of hire-purchase in India

The British concept of hire-purchase has, however, been there in India for more than 6
decades. The first hire-purchase company is believed to be Commercial Credit Corporation,
successor to Auto Supply Company. While this company was based in Madras, Motor and
General Finance and Instalment Supply Company were set up in North India. These
companies were set up in the 1920s and 1930s.
Development of Hire-purchase took two forms: consumer durables and automobiles.
Consumer durables hire-purchase was promoted by the dealers in the respective equipment.
Thus, Singer Sewing Machine Company, or Murphy radio dealers would provide instalment
facilities on hire-purchase basis to the customers of their products. The other side developed
very fast - hire-purchase of commercial vehicles. The dealers in commercial vehicles as well
as pure financing companies sprang up.
Hire purchase is a type of instalment credit under which the hire purchaser (Hirer),
agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of
principal as well as interest, with an option to purchase. Under this transaction, the hire
purchaser acquires the property (goods) immediately on signing the hire purchase agreement
but the ownership or title of the same is transferred only when the last instalment is paid.

What is Hire purchase

The hire purchase system is regulated by the Hire Purchase Act 1972. This Act
defines a hire purchase 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 the agreement and
includes an agreement under which
1) The owner delivers possession of goods thereof to a person on condition that such person
pays the agreed amount in periodic instalments.
2) The property in the goods is to pass to such person on the payment of the last of such
instalments, and
3) Such person has a right to terminate the agreement at any time before the property so
passes

Parties Involved in Hire purchase

Basically there are two parties involved in a hire purchase contract, namely the
intending seller and the intending buyer or hirer. Now a days hire purchase contract involves
three parties, namely the seller, the financier, the hirer.
Seller: - The seller is the (hiree) who agrees to part with the possession of the goods to the
buyer (hirer) for a consideration which will be spread over a specific period of time.
Buyer: - The purchaser or the buyer is also known as hirer who purchases the goods on hire
purchase from the seller agreeing to pay the value of the goods in regular instalments spread
over a specific period of time.
Financer: -In most of the hire purchase contracts there are only two parties; the seller and the
buyer but in certain rare the cases there may be a third party, the hire purchase financer who
pays the price of the goods to the seller on behalf of the buyer and then collects the dues
along with interest from the buyer of the goods.
A dealer now normally arranges a hire purchase agreement through a finance company with
the customer. It is therefore, a tripartite deal.

Modus operandi

 The finance (hire purchase) company purchases the equipment from the supplier and
gives it on hire.
 The hirer is required to make a down payment of 20-25% of the cost and pay the
balance amount along with the interest in EMI, in advance or arrears over a time span
of 36-48 months.
 Alternately, instead of the down payment, the hirer has to deposit an equal amount as
a fixed deposit with the finance company which provides the entire finance on hire
purchase terms, repayable with interest in EMIs over 36-48 months.
 Deposit and the accumulated interest is returned to the hirer upon payment of the last
instalment.
 The interest on each hire purchase instalment is computed on the basis of flat rate of
interest and the effective rate of interest is applied to the declining balance of the
original loan amount to determine the interest component of instalment. For a given
flat rate of interest, the equivalent effective rate of interest is higher.

The hirer's rights

 To buy the goods at any time by giving notice to the owner and paying the balance of
the HP price less a rebate (each jurisdiction has a different formula for calculating the
amount of this rebate)
 To return the goods to the owner — this is subject to the payment of a penalty to
reflect the owner's loss of profit but subject to a maximum specified in each
jurisdiction's law to strike a balance between the need for the buyer to minimize
liability and the fact that the owner now has possession of an obsolescent asset of
reduced value.
 With the consent of the owner, to assign both the benefit and the burden of the
contract to a third person. The owner cannot unreasonably refuse consent where the
nominated third party has good credit rating
 Where the owner wrongfully repossesses the goods, either to recover the goods plus
damages for loss of quiet possession or to damages representing the value of the
 goods lost. Basically hirer has following rights- 1-Rights of protection 2-Rights of
notice 3-Rights of repossession 4-Rights of Statement 5-Rights of excess amount

The hirer's obligations

 To pay the hire instalments.

 To take reasonable care of the goods (if the hirer damages the goods by using them in
a non-standard way, he or she must continue to pay the instalments and, if
appropriate, compensate the owner for any loss in asset value)
 To inform the owner where the goods will be kept.

The owner's rights

The owner usually has the right to terminate the agreement where the hirer defaults in
paying the instalments or breaches any of the other terms in the agreement. This entitles the
owner:
 To forfeit the deposit
 To retain the instalments already paid and recover the balance due
 To repossess the goods (which may have to be by application to a Court depending on
the nature of the goods and the percentage of the total price paid)
 To claim damages for any loss suffered.

Hire Purchase Vs Instalment Payment System

Hire Purchase Instalment Payment System

Sale
The hirer has the option to purchase the The sale has already taken place, goods have
the goods anytime during the term of already been delivered to the owner and the
the agreement. He also has the right buyer is bound to pay the full price.
to terminate the agreement at anytime
before payment of the last instalment.
Ownership Ownership is transferred to the purchaser on
Ownership is passed to the hirer only payment of the first instalment.
if he exercises the option to purchase.
Hire Purchase Vs Lease Financing

Hire Purchase Lease Financing

Ownership
The ownership of the equipment passes to the The lessor company is the owner and the
hirer on payment of the last instalment. lessee is entitled only to the use of the leased
equipment.

Depreciation
The hirer is entitled depreciation shield on
the assets hired by him.
Tax Benefits
Hirer is allowed the depreciation claim and
finance charge and the seller may claim any
interest on borrowed funds to acquire the
asset for tax purposes.
To the Depreciation on the asset is charged in
the books of the lessor.
The lessor is allowed to claim depreciation
and lessee is allowed to claim rentals and
maintenance cost Against taxable income.

Maintenance
Cost of maintaining the hired equipment is to Maintenance of the leased asset is the
be borne by hirer itself. responsibility of the lesse.

Extent
20-25% of the cost of the equipment is
required to be paid by the hirer as down
payment.
Magnitude
The magnitude of funds involved is relatively
low
Subjects of hire purchase Automobiles,
generators, office equipment etc. are usually
hire purchased.
No down payment is required from the
lessee.
The magnitude of funds involved is . very
large.
Subject of Lease Financing
Aircrafts, ships, machinery are taken on
financial lease.