ASSIGNMENT
TOPIC
HIRE PURCHASE
HIRE PURCHASE
Hire purchase is a type of installment credit under which the hire
purchaser, called the 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 installment is paid. 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
installments.
2. The property in the goods is to pass to such person on the
payment of the last of such installments, and
3. Such person has a right to terminate the agreement at any time
before the property so passes.
Many kinds of business asset are suitable for financing using hire
purchase or leasing including:
- Plant and machinery, Business cars, Commercial vehicles,
Agricultural equipment, Hotel equipment, Medical and dental
equipment, Computers, including software package, Office equipment.
CHARACTERISTICS OF HIRE PURCHASE
The following are the important characteristics of Hire Purchase :
• Possession :
The possession of the goods is with the purchaser after the hire
purchase agreement is entered between the lender and the
purchaser.
• Ownership upon the full payment :
Even though the possession of the asset is with the purchaser,
the ownership will be retained by the lender. Ownership will be
transferred to the purchaser only after completing the payment
agreed upon in hire purchase agreement.
• Installment buying :
Hire purchase enables customers to buy high priced assets
through installments. This enables the customers to have the
luxury of costly assets by paying a nominal interest rate in
installments.
• Social Innovation :
Hire purchase enables consumers to buy costly innovative assets
in easy installments. This enhances the social innovations in the
society.
• Expands economy :
By enabling consumers to buy more innovative products in easy
installments, hire purchase enhances the sale of consumers
goods thereby expanding the nations economy.
OPERATION OF HIRE PURCHASE TRANSACTION
• The Finance company purchases the equipment from the
supplier and gives it on hire. After the hirer and the lender enter
into hire purchase agreement, the hirer gets the required asset
from the supplier and gives it to the purchaser.
• The hirer is required to pay a down payment of 20 – 25 % of the
cost and pay the balance amount along with interest in advance
or arrears over a time period of 36 – 48 months.
• For the balance amount, hirer has to deposit an equal amount as
a fixed deposit with the finance company which provides entire
finance of hire purchase terms.
• Deposits and the accumulated interest is returned to the hirer
after fulfilling the hire purchase agreement terms.
• The interest on each hire purchase installment is computed on
the basis of flat rate of interest and is applied to the declining
balance of original loan amount.
THE HIRER'S RIGHTS
The hirer usually has the following rights:
1. 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)
2. 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
3. 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
4. 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.
THE OWNER'S RIGHTS
The owner usually has the right to terminate the agreement where the
hirer defaults in paying the installments or breaches any of the other
terms in the agreement. This entitles the owner:
1. to forfeit the deposit
2. to retain the installments already paid and recover the balance
due
3. 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)
4. to claim damages for any loss suffered.
HIRE PURCHASE COST
• Hire purchase finance provides a high interest of income to hire
purchase companies. They earn double the nominal interest
rates applicable for normal lending. In hire purchase
agreements, the interest rates charged are much higher
compared to loans provided by banks and other financial
institutions. This provides huge profit to financers.
• Under the various systems of consumer credit, interest is
calculated on the nominal rate that is added to the cash price of
the asset purchased.
• The amount of installment is determined by dividing the
purchase price with number of months of credit provided by the
financer.
• Interest liability remains the same through out the period of
credit as interest is calculated on fixed cost price of the asset.
Nominal interest to be paid the lender is calculated on the cost
price of the asset which he is purchasing, and is uniform
throughout the period of hire purchase agreement.
ELIGIBILITY TO ENTER INTO HIRE PURCHASE AGREEMENTS
• People with a regular and stable income, and capacity to pay
installments from the current income.
• The person must be competent to enter into a contract. Minors
are not eligible.
• Foreigners and people not having permanent residence in the
country are disqualified for availing hire purchase.
ADVANTAGES OF HIRE PURCHASE
• No immediate cash. There is need to pay just 20 – 25 % of the
hire purchase value as initial payment. Balance amount can be
paid in easy installments with a nominal interest.
• Easy possession. The possession of the goods will be with the
hirer as soon as the initial formalities are completed
• Economic growth. Consumers can purchase costly assets very
easily through hire purchase schemes. This in turn leads to
growth in economy.
• Thrift. Consumers can avail costly goods at a very nominal
installment rates. This makes the consumers to spend more and
purchase more costly goods.
DISADVANTAGES OF HIRE PURCHASE
• May lead to bankruptcy. Hirer may buy many assets and may be
unable to pay his installments on time.
• Buyer has to mortgage his property as a deposit for paying the
balance amount of hire purchase.
• Buyer may incur loss due to high rate of interest charged by the
lender.
• Buyer may loose the already paid installments if he fails to pay
the remaining balance of installments.
• If the buyer fails to pay the installments, then it is a complete
loss on the part of the lender.
