Hire Purchase

Sales promotion device that creates customer purchasing power in the form of a fixed cost, fixed period installment loan, secured by a lien on the

purchased item as the collateral. In case of capital equipment the customer repays the loan from the earnings generated by the purchased asset.

characteristics Possession Ownership upon the full payment Installment buying Social innovation Expands economy Additional income

Definition
According
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 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
(Hirer) on the payment of the last installment. any time before the property so passes.

The property of the goods will pass to such a person 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 2025% of the cost and pay the balance amount along with interest in advance or arrears over a time period of 3648months 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 3648 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 buyers

May 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 of default by the buyer.

Leasing

v/s Hire purchase

Ownership of the property is

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

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

allocated to HP period equally

Leasing

v/s hire purchase

The hirer can claim benefit

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

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 hirer is responsible to

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 lessors p&l a/c

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 taken into vendor p&l a/c

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. 2. 3.

They are forms of consumer finance for the sale of expensive and durable goods. They are recognized by the Indian sale of goods act. Recovery of the price is through installments spread over a fixed period of time.

Suitability: 1. Separate identity or individuality to facilitate their

2.

recovery when there is a default. 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 necessary