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In case of capital equipment the customer repays the loan from the earnings generated by the purchased asset. secured by a lien on the purchased item as the collateral. characteristics       Possession Ownership upon the full payment Installment buying Social innovation Expands economy Additional income .Meaning  Sales promotion device that creates customer purchasing power in the form of a fixed cost. fixed period installment loan.

Such a person has a right to terminate the agreement any time before the property so passes.    .“An agreement under which goods are let on hire under which the hirer has an option to purchase them in accordance with the terms of agreement and include an agreement under which Possession of goods is delivered by the owner thereof to a person on the condition that such person pays the amount in periodic payments The property of the goods is to pass to such a person on the payment of the last installment.definition According to hire purchase act of 1972.

instead of the down payment. . the hirer as to deposit an equal amount as a fixed deposit with the finance co which provides entire finance on hire purchase terms.Operation of HP transaction    The finance company purchases the equipment from the supplier and gives it on hire. repayable with interest in emi over 36-48 months. The hirer is required to make 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 36-48months Alternatively.

.Continued…. The interest on each hire purchase installment is computed on the basis of flat rate of interest is applied to the declining balance of original loan amount to determine the interest component of installment for a given flat rate of interest..   Deposits and the accumulated interest is returned to the hirer upon the payment of last installment. the equivalent effective rate of interest is higher.

Advantages & disadvantages      No immediate cash Easy possession Economic growth Thrift Relief to buyer        Reputed buyers May lead to bankruptcy Buyer has to mortgage his property Buyer may incur loss May lose paid installments in the event of default It is expensive Loss to seller in the event of default by the buyer. .

  Deals with the buyer is committed to pay full price.Hire purchase v/s installment purchase   Deals with the terms of agreement and right of termination before the payment of last installment The ownership is transferred to the hirer only when on payment of the last installment. The ownership in the goods purchased passes on to the buyer along with the payment of first installment. .

not transferred to lessee. Finance charges are allocated to HP period equally     Ownership of the property lies with lessor. Only the hire interest is eligible for tax computation in the books of the hirer. The hirer is entitled to claim depreciation tax shield. Capitalization of the asset is done in the books of lessor The entire lease payments are eligible for tax computation in the books of lessee Lessor income declines as the investment o/s in lease declines     . Lessor.Leasing  v/s  hire purchase Ownership of the property is transferred to the hirer on the payment of the last payment. is entitled to claim depreciation tax shield. Capitalization of asset is done in the books of hirer.

automobiles. usually for acquiring high cost assets i. office equip Down payment is required to be made for acquiring the assets and a margin maintained to the extent of 20-25% Asset bought on hire purchase will be shown as asset .P is used as a source of finance usually for acquiring relatively low cost assets i... machinary . ships. airplanes . H.e.e. Leased assets are disclosed by way of a note only in the books of lessee     The hirer can claim benefit of salvage value as the owner of the asset. etc No down payment is required for acquiring the use of leased assets.Leasing  v/s hire purchase    The lessor has the right to claim the benefit of salvage value Leasing is used as a source of finance.

Not suitable for low capital enterprises An asset given by a leasing company is treated as fixed asset of lessor All receipts from lessee is taken into lessor p&l a/c    The hirer is responsible to ensure the maintenance of asset bought.Leasing  v/s hire purchase     The lessee has to maintain the leased asset in case of financial lease. It is highly suitable for low capital enterprises which need to show a strong asset position in their balancesheet The hire vendor normally shows the asset let under HP either as stock in trade or receivables Only interest portion is taken into vendor p&l a/c . up keep is the responsible of lessor in case of operating lease.

Hire purchase cost     Hire purchase finance provides a high interest of income to HP company. The amount of installment is determined by dividing the purchase price with number of months of credit provided by the financer. interest is calculated on the nominal rate that is added to the cash price of the asset purchased. Under the various systems of consumer credit. . Interest liability remains the same through out the period of credit as interest is calculated on fixed cost price of the asset. they earn double the nominal interest rates applicable for normal lending.

and capacity to pay installments from the current income The person must be competent to enter into a contract . Minor is not eligible Foreigners and people not having permanent residence in the country are disqualified for availing such forms of credit sales.Eligibility to enter into HP transactions    People with a regular and stable income. .

whereby the payments of the purchase price is deferred. Features : An ordinary sale of goods with easy payment system The buyer obtains ownership and possession on payment of the first installment Payment is made through a number of installments.Installment credit systems (ICS)      A system of customer financing. . since sale is complete immediately after the execution of the agreement. No possibilities of the article sold being returned to the seller. to be paid in reasonable installments is known as ‘ installment credit systems’.

Separate identity or individuality to facilitate their recovery when there is a default. They are forms of consumer finance for the sale of expensive and durable goods. 2. 2. They are recognized by the Indian sale of goods act.Hire purchase & installment system Similarities: 1. Durability to sustain the long period of installments and facilitate re possession in the event of a default . Recovery of the price is through installments spread over a fixed period of time. Suitability: 1. 3.

Continued…    Portability to facilitate re-possession in the event of default. High enough value to justify a hire purchase agreement Standard specifications to facilitate reselling. if necessary .

.Accounting standard on hire purchase: there is no separate accounting standard connected with hire purchase transaction. One reason for this can be the fact that treatment of a financial lease is almost similar to that of a hire purchase transaction.