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Hire Purchase

Hire Purchase

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Published by: muthu_theone6943 on Dec 20, 2010
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05/12/2014

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Hire Purchase
Evolution of hire-purchase in India
The British concept of hire-purchase has, however, been there in India for more than 6decades. 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 andGeneral Finance and Instalment Supply Company were set up in North India. Thesecompanies 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 instalmentfacilities on hire-purchase basis to the customers of their products. The other side developedvery fast - hire-purchase of commercial vehicles. The dealers in commercial vehicles as wellas 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 Actdefines a hire purchase as “an agreement under which Goods are let on hire and under whichthe hirer has an option to purchase them in Accordance with the terms of the agreement andincludes an agreement under which1) 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 suchinstalments, and3) 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 theintending seller and the intending buyer or hirer. Now a days hire purchase contract involvesthree 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 spreadover 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 duesalong with interest from the buyer of the goods.A dealer now normally arranges a hire purchase agreement through a finance company withthe customer. It is therefore, a tripartite deal.
Modus operandi
The finance (hire purchase) company purchases the equipment from the supplier andgives 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 spanof 36-48 months.
Alternately, instead of the down payment, the hirer has to deposit an equal amount asa 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 lastinstalment.
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 theoriginal loan amount to determine the interest component of instalment. For a givenflat 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 theamount of this rebate)
To return the goods to the owner — this is subject to the payment of a penalty toreflect 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 minimizeliability 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 thecontract to a third person. The owner cannot unreasonably refuse consent where thenominated third party has good credit rating
Where the owner wrongfully repossesses the goods, either to recover the goods plusdamages 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 ina 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 theowner:
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 onthe nature of the goods and the percentage of the total price paid)
To claim damages for any loss suffered.
Hire Purchase Vs Instalment Payment SystemHire PurchaseInstalment Payment SystemSale
The hirer has the option to purchase thethe goods anytime during the term of the agreement. He also has the rightto terminate the agreement at anytime before payment of the last instalment.The sale has already taken place, goods havealready been delivered to the owner and the buyer is bound to pay the full price.
Ownership
Ownership is passed to the hirer onlyif he exercises the option to purchase.Ownership is transferred to the purchaser on payment of the first instalment.

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