Hire Purchase
Hire Purchase
Sales promotion device that creates customerSales promotion device that creates customer
purchasing power in the form of a fixed cost, fixed purchasing power in the form of a fixed cost, fixed period installment loan, secured by a lien on the period installment loan, secured by a lien on the purchased item as the collateral. In case of capital purchased item as the collateral. In case of capital equipment the customer repays the loan from the equipment the customer repays the loan from the earnings generated by the purchased asset.
earnings generated by the purchased asset.
characteristics characteristics
PossessionPossession
Ownership upon the full paymentOwnership upon the full payment
Installment buyingInstallment buying
Social innovationSocial innovation
Expands economy Expands economy
Definition
A
ccording to hire purchase act of 1972.“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 agreementunder 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 will pass to such a person
(Hirer) on the payment of the last installment.
Such a person has a right to terminate the agreement at
Operation of HP transaction
The finance company purchases the equipment from
the supplier and gives 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 interest in advance or arrears over a time period of 36-48months
Alternatively, 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, repayable with interest in emi over 36-48 months.
Continued…..
Deposits and the accumulated interest is
returned to the hirer upon the payment of last installment.
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, the equivalent effective rate of interest is higher.
Advantages & disadvantages
No immediate cash Easy possession Economic growth Thrift Relief to buyer Reputed buyersMay lead to bankruptcy
Buyer has to mortgage his
property
Buyer may incur loss May loose paid
installments in the event of default
It is expensive
Loss to seller in the event
Leasing
v/s Hire purchase
Ownership of the property
lies with lessor, not transferred to lessee.
Lessor, 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
Ownership of the property is
transferred to the hirer on the payment of the last payment.
The hirer is entitled to claim
depreciation tax shield.
Capitalization of asset is
done in the books of hirer.
Only the hire interest is
eligible for tax computation in the books of the hirer.
Finance charges are
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, usually for
acquiring high cost assets i.e., machinary, ships,
airplanes,etc
No down payment is
required for acquiring the use of leased assets.
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.
H.P is used as a source of
finance usually for
acquiring relatively low cost assets i.e.,
automobiles, 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
Leasing
v/s Hire purchase
The lessee has to maintain
the leased asset in case of financial lease, up keep is the responsibility of lessor in case of operating lease.
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’s p&l a/c
The hirer is responsible to
ensure the maintenance of asset bought.
It is highly suitable for low
capital enterprises which need to show a strong asset position in their balance sheet
The hire vendor normally
shows the asset let under HP either as stock in trade or receivables
Only interest portion is
Hire Purchase Cost
Hire purchase finance provides a high interest of
income to HP company , they earn double the nominal interest rates applicable for normal lending.
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.
Eligibility to enter into HP Transactions
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 . Minor is not eligible
Foreigners and people not having permanent
residence in the country are disqualified for availing such forms of credit sales.
Hire purchase & installment system
Similarities
:
1. They are forms of consumer finance for the sale of expensive and durable goods.
2. They are recognized by the Indian sale of goods act.
3. Recovery of the price is through installments spread over a fixed period of time.
Suitability:
1. Separate identity or individuality to facilitate their recovery when there is a default.
2. Durability to sustain the long period of installments and facilitate re possession in the event of a default
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
