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Special Studies In Finance

(Hire Purchase)

Group 4

Sejal Mangal – 90

Shruti Bhende – 71

Diwanshu Shevkani – 49

Harshit Tambi – 55

Yash Agarwal – 62

Rahul Khanna – 87

Nikheta Panday – 96

Rikhav Shah – 108

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Serial No. Title Page No.

1 Evolution of Hire Purchase and definition 3

2 Hirer and Owner – Rights and Obligations 4

3 Difference from Lease and Installment Sale 5

4 Features 5

5 Advantages 6

6 Disadvantages 6

7 Treatment in Books of Accounts 7

8 Example and Sample 10, 11

9 Bibliography and Acknowledgements 15

Hire – Purchase
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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 Installment 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 installment
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.

What is hire-purchase?

A process of buying expensive goods by making regular payments over a period of time. Under
hire purchase, the person buying the goods has a right to use the goods during the time they are
paying for them, but does not become the legal owner until the final payment has been made.

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

The seller and the owner

If the seller has the resources and the legal right to sell the goods on credit (which usually
depends on a licensing system in most countries), the seller and the owner will be the same
person. But most sellers prefer to receive a cash payment immediately. To achieve this, the seller
transfers ownership of the goods to a Finance Company, usually at a discounted price, and it is
this company that hires and sells the goods to the buyer. This introduction of a third party
complicates the transaction. Suppose that the seller makes false claims as to the quality and
reliability of the goods that induce the buyer to "buy". In a conventional contract of sale, the
seller will be liable to the buyer if these representations prove false. But, in this instance, the
seller who makes the representation is not the owner who sells the goods to the buyer only after
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all the installments have been paid. To combat this, some jurisdictions make the seller and the
finance house jointly and severally liable to answer for breaches of the purchase contract.

Implied warranties and conditions to protect the hirer

The extent to which buyers are protected varies from jurisdiction to jurisdiction, but the
following are usually present:

1. the hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will interfere
with the hirer's possession during the term of this contract

2. the owner will be able to pass title to, or ownership of, the goods when the contract
requires it

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.

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

The hirer usually has the following obligations:

1. to pay the hire installments

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2. 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 installments and, if appropriate,
compensate the owner for any loss in asset value)

3. 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
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.

Difference between lease and hire-purchase

Hire purchase should be distinguished from installment sale wherein property passes to the
purchaser with the payment of the first installment. But in case of HP (ownership remains with
the seller until the last installment is paid) buyer gets ownership after paying the last installment.
HP also differs from leasing.

A lease transaction is a commercial arrangement, whereby an equipment owner or

manufacturer conveys to the equipment user the right to use the equipment in return for a
rental. Hire purchase is a type of installment credit under which the hire purchaser 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.

Features of Hire Purchase Agreement:

1. The entire interest that is accumulated by the hiree is distributed. This distribution is done
on the basis of method sum of the years digits.
2. The counterpart of the lessor or the hiree buys a particular property. He then provides the
hirer or the counterpart of the lessor the property on a rental basis.

3. The hiree usually takes a flat rate of interest. This means that a specified portion of the
interest rate is calculated on the basis of the investment made at the beginning by the
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hirer. The figure is normally around 14 percent. The interest rate is not taken on the basis
of diminishing balance.

The Advantages of Hire Purchase Agreements to the consumers –

1. Spread the cost of finance –

Whilst choosing to pay in cash is preferable, this might not be possible for consumer on a tight
budget. A hire purchase agreement allows a consumer to make monthly repayments over a pre-
specified period of time;  

2. Interest-free credit –

Some merchants offer customers the opportunity to pay for goods and services on interest free
credit. This is particularly common when making a new car purchase or on white goods during
an economic downturn; 

3. Higher acceptance rates –

The rate of acceptance on hire purchase agreements is higher than other forms of
unsecured borrowing because the lenders have collateral; 

4. Sales –

A hire purchase agreement allows a consumer to purchase sale items when they aren't in a
position to pay in cash. The discounts secured will save many families money; 

5. Debt solutions - Consumers that buy on credit can pursue a debt solution, such as a
debt management plan, should they experience money problems further down the line.

The Disadvantages of Hire Purchase Agreements to the consumers -

1. Personal debt - A hire purchase agreement is yet another form of personal debt it is monthly
repayment commitment that needs to be paid each month; 

2. Final payment - A consumer doesn't have legitimate title to the goods until the final monthly
repayment has been made; 
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3. Bad credit - All hire purchase agreements will involve a credit check. Consumers that have
a bad credit rating will either be turned down or will be asked to pay a high interest rate; 

4.Creditor harassment - Opting to buy on credit can create money problems should a family
experience a change of personal circumstances; 

5.Repossession rights - A seller is entitled to 'snatch back' any goods when less than a third of the
amount has been paid back. Should more than a third of the amount have been paid back, the
seller will need a court order or for the buyer to return the item voluntarily.

Accounting in the books of Hire-purchaser

There are two methods of accounting in the books of Hire-purchaser. Their detailed description
is as under:-

A. Asset Accrual Method:

Under this method it is considered that the hire-purchaser is the owner of the asset up to the
value of the cash price paid by him in the form of down payment or the cash price paid included
in various installments. The following journal entries are recorded under this method.

i) On taking the delivery of asset:

No entry is recorded.

(ii)On making the down payment (if any)

Asset A/c Dr. (Amount of down payment)

To Cash/Bank A/c.

(iii)On becoming the instalment due

Asset a/c. Dr (Balancing figure)

Intt. A/c. Dr. (Amt. of Intt.)

To Hire-Vendor A/c. (Amt. of Instalment)

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(iv)On payment of instalment:

Hire-Vendor A/c Dr. (Amt. of Instalment)

To Cash/Bank A/c.

(v)On charging the Depreciation:

Depreciation A/c Dr. (Amt. of Depreciation)

To Asset A/c.

(vi) On Transfer of interest and depreciation to P/L A/c:

P/L A/c. (Total amt.)

To Interest A/c (Bal. of Intt. A/c.)

To Depreciation A/c. (Bal. of Dep. A/c.)

B. Under Total Assets Value Method:

Under this method of accounting in the books of hire-purchaser, is done on the assumption that
the ownership of the asset is also transferred to the purchaser with the delivery of goods. The
following journal entries are recorded under this method.

(i)On taking the delivery of assets at the time of agreement:

Asset A/c Dr. (Cash price of Asset)

To Hire vendor A/c.

(ii)On making the down-payment (if any):

Hire-Vendor....... A/c. Dr. (Amount of down payment)

To Cash/Bank A/c

(iii)On becoming the installment due: 

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Interest A/c. Dr. (Amount of interest)

To Hire-Vendor A/c

(iv)On payment of installment:

Hire-Vendor a/c Dr. (Amount of instalment)

To Cash/Bank A/c

(v)On charging the depreciations:

Depreciation A/c. Dr. (Amount of depreciation)

To Asset A/c.

(vi)On Transfer of interest and depreciation to P/L A/c:

P/L A/c. Dr. (Total)

To Interest A/c. (Bal. of Intt. A/c.)

To Depreciation A/c. (Bal. of Dep. A/c.)

EXAMPLE

Hire Purchase (HP) is the traditional way to finance a car purchase. You pay off the entire price
of the vehicle through a series of monthly payments. At the end of the contract period the vehicle
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becomes your property. The monthly payment is determined by the amount of deposit paid, the
period of the contract and the sale price of the vehicle.

HP is very similar to borrowing a sum of money from a bank and paying it back over a fixed
period of time, with interest. Hire purchase is a type of secured loan which are often preferred
over alternative (unsecured) loans because they allow a greater borrowing limit. The term
"secured loan" means exactly that, a loan that the lender can secure against an asset (in this case,
a car).

SAMPLE AGREEMENT

AGREEMENT FOR HIRE-PURCHASE OF A MOTOR VEHICLE

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THIS AGREEMENT made at ............. this ............ day of .........., 2000, between A son
of B resident of ............. (hereinafter called "the owners") of the ONE PART and C son of D
resident of ... ...................... (hereinafter called "the hirer") of the OTHER PART.

WHEREAS the owner is the owner of a motor vehicle, more particularly described in the
Schedule hereto and the hirer has approached the owner to let the said vehicle on hire to him, to
which the owner has agreed and has assured the hirer that he shall have and enjoy quiet
possession of the said vehicle.

AND WHEREAS the owner has further assured the hirer that he shall have the right to
sell the said vehicle at the time the property is to pass and the said vehicle is free from any
charge or encumbrances in favour of any third party at the time when the property is to pass.

AND WHEREAS the hirer has inspected the said vehicle and is satisfied about the same
and considers it fit for the purposes for which he requires the same.

NOW IT IS AGREED BETWEEN THE PARTIES AS FOLLOWS:

1. The owner will let and the hirer will take on hire the vehicle more particularly described
in the Schedule hereto.

2. The owner has delivered the said vehicle to the hirer and has vehicle allowed
the hirer to use the said vehicle in the usual manner.

3. In consideration of the delivery of the said vehicle to the hirer, the latter has paid in
advance a sum of Rs. .............. as first installment on hire (the receipt whereof the owner
hereby acknowledges) and will punctually pay to the owner at his place the sum of
Rs. ............. every calendar month by way of rent for the hire of the said vehicle, the first
payment to be made on the ............. day of ............. and each subsequent payment on
the ............. day of every succeeding month.

4. During the continuance of hiring, the hirer shall-

(i) Not sell, assign, pledge, mortgage, underlet, lend or part with the possession of
the said vehicle and not allow the said vehicle to be used by anybody else or kept
or detained or run for the use of any other person.

(ii) Not take the said vehicle out of the city of ............. unless he has obtained a
permission in writing from the owner in that behalf and if the owner grants
permission subject to certain terms and conditions, the hirer shall abide by all the
terms and conditions imposed in respect of such permission.

(iii) Pay all licence duties, fees, registration and other charges taxes,
payable in respect of the said vehicle and keep the said vehicle in a good repair
condition and working order and will permit the owner and persons authorised by
him to have access to the said vehicle for the purpose of inspecting the condition
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thereof. In case the hirer fails or neglects to cause the said vehicle to be repaired
or kept in a proper state of repair, the owner shall be entitled but shall not be
bound to do ,so, to seize or cause the said vehicle to be seized and to get the same
repaired and to keep the said vehicle in his custody till the hirer pays the bills for
repair of the said vehicle.

(iv) Keep the said vehicle insured and kept insured so long as the hiring shall continue
in the joint names of the owner and the hirer against all risks and the hirer shall
pay all the premiums payable to the insurance company. On the hirer becoming
the owner of the said vehicle under the terms of this agreement, the owner will
transfer to the hirer the benefit of any insurance policy then current relating to the
said vehicle.

(v) Make good to the owner all damages to the said vehicle (fair wear and tear
excepted) and pay the owner the full value of the said vehicle in the event of its
total loss.

(vi) Indemnify the owner against claims by third parties arising by accident caused by
the said vehicle until the said vehicle is returned to the owner or purchased by the
hirer in terms of this agreement.

(vii) Not use or permit or suffer the said vehicle to be used in contravention of any law
for the time being in force.

4. If the hirer shall duly observe and performs all the conditions herein contained and on his
part to be observed and performed and shall pay to the owner the sum specified in clause
3 hereof, together with all other sums if any payable by him to the owner under the
provisions of this Agreement, then the hiring shall come to an end and the said vehicle
shall become the property of the hirer and the owner will assign and make over all his
rights and interest in the same to the hirer, but the hirer shall have the option of
purchasing the said vehicle at any time during the period of hiring by paying in one lump
sum the balance of all the hire hereinbefore mentioned and other expenses incurred by the
owner. Until all such payments as aforesaid have been made, the said vehicle shall
remain the property of the owner.

5. The hirer may at any time terminate the hiring by returning the said vehicle at his own
cost and risk to the owner at his place of address for the time being.

6. If the hirer shall make default in payment of any monthly sum payable hereunder
for ......... days after the same have become due or shall fail to observe or perform any of
the terms and conditions of this agreement, the owner may without prejudice to his claim
for arrears of hire or damages (if any) for breach of this agreement forthwith terminate
the hiring without notice and retake physical possession of the said vehicle himself or
through his agents or servants and the hirer shall not object to the retaking of possession
of the said vehicle by the owner or his agents or servants and/or by written notice to the
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hirer determine this agreement and the hiring hereby constituted. On such termination,
the hirer shall immediately return the said vehicle to the owner at his place of address for
the time being and the hirer shall pay the owner a sum of Rs............... every month until
the said vehicle is returned to the owner.

7. No neglect, delay or indulgence on the part of the owner in enforcing any terms or
conditions of this agreement shall prejudice the rights of the owner hereunder.

8. The agreement is personal to the hirer and the rights of the hirer shall not be assignable or
chargeable by him in favour of third party.

9. In the event of the hiring being determined by the hirer or by the owner under clause 6
hereof, the hirer shall forthwith return the said vehicle to the owner at the hirer's expense.
The determination of the hiring as aforesaid shall not affect or prejudice any claim the
owner may have against the hirer for arrears of hire payments or for damages for breach
of this agreement or his right to enforce such claim by action or otherwise.

10. The owner has permitted the hirer to have the said vehicle registered in his own name in
terms of the provisions of Motor Vehicles Act, 1988 and the rules framed thereunder
provided that the hirer shall transfer such registration in favour of the owner when he
returns the said vehicle to the owner under the terms of this agreement.

11. The agreement shall determine if the hirer commits any act of bankruptcy or makes any
arrangement with his creditors or on presentation of a petition in the court for
adjudicating the hirer as an insolvent or on the appointment of a receiver of the properties
of the hirer or if an application is made by any creditor or other person against the hirer
for the attachment of the said vehicle.

12. All disputes, differences and/or claims, arising out of this agreement shall be settled by
arbitration in accordance with the provisions of Indian Arbitration Act, 1940 or any
statutory modification thereof and shall be referred to the sole arbitration of
Shri .................... or in case of his death, refusal, neglect, incapability to act as an
arbitrator to the sole arbitration of Shri...................... The award given by the arbitrator
shall be final and binding on the parties.

13. The parties hereby admit that this agreement has been fully explained to them and they
have understood the meaning of all the clauses of this agreement and they have signed
this agreement with full understanding of the obligations herein.

IN WITNESS WHEREOF, the parties have hereunto set and subscribed their hands on
the date and year above mentioned.

Signed and delivered by the within named owner

Signed and delivered by the within named hirer

WITNESSES;
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1.

2.

BIBLIOGRAPHY

http://finance.mapsofworld.com/corporate-finance/leasing/hire-purchase-arrangement.html
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www.strattonfinance.com.au/.../hire-purchase/features-benefits.aspx

www.financeezi.com.au/commercial_hire_purchase.php

ACKNOWLEDGEMENTS

We would like to thank Prof.Sapna Mallya for giving us this wonderful opportunity to work on

this project as this helped us to gain insight into the working of a hire purchase model and its

obligatory aspects. Thank you.