HIRE PURCHASE

‡ A hire purchase agreement is defined as peculiar kind of transaction in which the goods are let on hire with an option to the hirer to purchase them,with the following stipulations: 
Payment to be made in instalments over a specified period.  The possession is delivered to the hirer at the time of entering into the contract.  The property in the goods passes to the hirer on payment of the last instalment.

say 20-25 % of the cost and pay balance with the interest in Equated Monthly Instalment(EMI) spread over 36-48 months. ‡ The finance(hire purchase) company purchases the equipment from the equipment supplier and lets it on hire to the hirer to use it who is required to make a down payment of. Each instalment is treated as hire charges so that if default is made in payment of any instalment. .the seller becomes entitled to take away the goods.  The hirer/purchaser is free to return the goods without being required to pay any further instalments falling due after the return.

‡ In instalment sale the ownership in the goods passes on the purchaser simultaneously with the payment of the initial/first instalment. .HIRE PURCHASE v/s INSTALMENT PAYMENT ‡ The right of the hirer to terminate the agreement at any time before the payment of the last instalment in the former while in the latter the buyer is committed to pay the full price.whereas in hire purchase the ownership is transferred to the hirer only when he exercises the option to purchase/or on payment of the last instalment.

‡ The depriciation on the asset is charged in the books of the lessor in case of leasing whereas the hirer is entitled to the depriciation shield on assets hired by him.LEASE FINANCE v/s HIRE PURCHASE FINANCE ‡ The lessor(finance company) is the owner and the lessee(user/manuf) is entitled to the economic use of the leased asset/equip only in case of the LF.The ownership is never transferred to the user(lessee) whereas the ownership of the asset passes on to the user(hirer) in case of hire purchase finance on payment of the last instalment. ‡ Cost of maintenance of hired asset is to be borne typically by the hirer himself whereas the lessor(seller) who has to bear the maintenance cost. .

.‡ LF is invariably 100% financing where it requires no margin money or immediate cash down payment by the lessee whereas in HP transaction typically a margin equal to 20-25% of the cost of the equipment is required to be paid by the hirer.

PARTIES TO HIRE PURCHASE CONTRACT ‡ Hire purchase contracts generally involve 3 parties.the financier and the hirer. .and so on. ‡ A tripartite hire purchase contract is arranged with following modalities:  The dealer contacts the finance company to finance hire purchase deals submitted by him.namely the seller. ‡ Dealer normally arranges a hire purchase agreement through a finance company with the customer.warranties that the dealer gives with each transaction.For this purpose.they enter into a contract drawing out the terms.

The finance company also notifies the same to the dealer and asks him to deliver the goods.  The customer then makes cash downpayment on completing the proposal form. .  The dealer then send the documents to the finance company requesting them to purchase the goods and accept the hire purchase transactions.The documents are generally printed by the finance company. The customer selects the goods and expresses his desire to acquire them on hire purchase.  The finance company signs the agreement and sends a copy to the hirer along with the instructions as to the payment of the instalments.The dealer arranges for him the full set of documents to be completed to make a hire purchase agreement.if not already done so.

 The hirer makes payment of the hire instalment periodically. The dealer delivers the goods to the hirer against the acknowledgments and the property in the goods passes on to the finance company.the hirer pays the last instalment and the property in the goods passes to him on issue of a completion certificate by the finance company .  On completion of the hire term.

TAXATION ASPECTS ‡ Income tax: Hire purchase.as a financing alternative.like other credit/finance companies. ‡ Interest tax: The hire purchase finance companies.offers tax benefits both to the hire vendor.have to pay interest tax under the Interest tax Act .a sale is deemed to take place only when the hirer exercises the option to purchase.(hire purchase finance company) and the hire purchaser(user of the asset).1974. ‡ Sales tax: A hire purchase deal is regarded as a sale immediately the goods are delivered and not on the transfer of the title of the goods.the taxable event is the delivery of the goods and not transfer of the title to the goods. That is. .For the purpose of levying sales tax.

 The number of instalments in which the hire purchase price is to be paid.but it has to be in writing and signed by both the parties to it. .  The cash price of the goods i.the amount.  The date of commencement of the agreement.PROVISIONS OF HIRE PURCHASE ACT 1972 ‡ Form and content of the hire purchase agreement:  There is no prescribed form for a hire purchase agreement.the person to whom and the place where each of the intalments is to be paid.e the price at which the goods may be purchased by the hirer for cash. ‡ It must contain:  The hire purchase price of the goods.due date.

 Besides. . Passing of property: Only on the completion of the purchase. Hire purchase charges: The net hire purchase charges must not exceed the statutory charges .where any part of the hire purchase price is. The description of the goods.Net hire purchase charges represents the difference between the net hire purchase price and the net cash price.in a manner sufficient to identify them.must be given in the agreement.a description of that part of the price.or is to be paid otherwise then in cash or by cheque.in the manner laid down in the agreement.

Thus where the goods are already pledged and the owner enters into a hire purchase agreement.it amounts to breach of warranty. ‡ The goods are warranted as free from any charges in favour of any third party.IMPLIED WARRANTIES ‡ The owner undertakes a warranty that the hirer shall have and enjoy quiet possession of the goods. .at the time the property in the goods is to pass.

reasonably fit for the purpose for which they have been produced and marketed.i.the purpose for which he requires the goods.e. ‡ The goods are fit for the hirer s purpose.IMPLIED CONDITIONS ‡ The goods are of merchantable quality.where the hirer expressely or implicitly informs the owner. .or any other person through which the negotiations were conducted. ‡ The goods correspond with the sample and the hirer has the reasonable opportunity to compare the bulk with the sample.

.where the goods are delivered under description.‡ The goods correspond with the description.