Hire Purchase System

Meaning:
Hire purchase is a method of financing of the fixed asset to be purchased on future date. Under this
method of financing, the purchase price is paid in instalments. Ownership of the asset is transferred after
the payment of the last installment.
Under hire purchase system, the purchaser gets the possession of the goods without paying the full price
for them.
He makes the part payment at the time of purchase and the balance is paid in easy installments
periodically. The important ingredient of this system is that the buyer becomes the owner of the goods
only after full and final payment of all the installments, till then he hires the goods and every installment
is treated as hiring charges paid by him.
If the purchaser makes default in the payment of an installment, the seller can take back the possession
of the goods. Some of the important definitions of hire purchase system are given here:
“Hire Purchase System is a system under which money is paid for goods by means of periodical
installments with the view of ultimate purchase. All money being paid in the mean time is regarded as
payment of hire and the goods become the property of the buyers only when all the installments have
been paid. “-— Carter
“The hire-purchase is a form of trade in which credit is granted to the customer on the security of a lien
on the goods.” —J. Stephenson
From the above mentioned definitions it is clear that the buyer takes the delivery of the article on the
payment of first installment and becomes the owner only after paying the final instalment. Hire purchase
type of business is usually carried in the case of durable consumer articles like sewing machines,
televisions, desert coolers and refrigerators etc.

Features of Hire Purchase:

The hire purchaser becomes the owner of the asset after paying the last installment. Every installment is
treated as hire charge for using the asset. Hire purchaser can use the asset soon after making the
agreement with the hire vendor. The hire vendor has the right to repossess the asset in case of
difficulties in obtaining the payment of installment
1. The item that is being referred to in the agreement.
2. The asset’s cash price.
3. The amount designated for each instalment.
4. The proposed date of paying each instalment.
5. The total hire purchase price with the initial down payment and the sum of instalments.
6. Both parties’ names and addresses.
7. A signed statement whereby the buyer guarantees to share the asset’s location with the seller.
8. A signed statement whereby the buyer has ten days of reconsidering the agreement after
receiving a copy.
9. All written contracts must include the term ‘Hire Purchase Agreement.’
10. The fees, charges, and penalties involved in the event of defaulting on the loan.

Parties to the Hire Purchase Contract:

There are two parties in a hire purchase contract

1. The intending seller

2. The intending purchaser or the hirer.
Tripartite agreement in Hire purchase:
Presently, there are three parties involved in India consisting of seller, financier and the hirer /
purchaser. Thus, a seller arranges a hire purchase agreement through a finance company with the
customer. So, it is a tripartite agreement.

Types of hire purchase agreements

There are two main types of hire purchases based on the functional purpose of the asset involved. These
types are the consumer and industrial hire purchase agreements.
 Consumer hire purchase
In this type of hire purchase, the rented goods are for personal purposes. The buyer does not intend to
use these products for business transactions. Instead, the asset is for the household. Moreover, the renter
is not a business or company. They are natural people.
 Industrial hire purchase
A financing institution leases the asset to a company or industry for business purposes. The buyer may
hire industrial equipment and purchase the machinery later.
The main features and benefits of industrial hire purchase include a fixed monthly payment, allowance
for early settlement, and the possibility of a variable interest rate on instalments. Licensed associations,
registered clubs, privately-owned companies, and limited public corporations are eligible for this hire
purchase.

Hire Purchase System: it’s Advantages and Disadvantages

Advantages of Hire Purchase System:

(1) Convenience in Payment:

The buyer is greatly benefited as he has to make the payment in installments. This system is greatly
advantageous to the people having limited income.
(2) Increased Volume of Sales:
This system attracts more customers as the payment is to be made in easy installments. This leads to
increased volume of sales.
(3) Increased Profits:
Large volume of sales ensures increased profits to the seller.
(4) Encourages Savings:
It encourages thrift among the buyers who are forced to save some portion of their income for the
payment of the installments. This inculcates the habit to save among the people.
(5) Helpful For Small Traders:
This system is a blessing for the small manufacturers and traders. They can purchase machinery and
other equipment on installment basis and in turn sell to the buyer charging full price.
(6) Earning Of Interest:
The seller gets the installment which includes original price and interest. The interest is calculated in
advance and added in total installments to be paid by the buyer.
(7) Lesser Risk:
From the point of view of seller this system is greatly beneficial as he knows that if the buyer fails to
pay one installment, he can get the asset back.

Disadvantages of Hire Purchase System:

(1) Higher Price:

A buyer has to pay higher price for the article purchased which includes cost plus interest. The rate of
interest is quite high.
(2) Artificial Demand:
Hire purchase system creates artificial demand for the product. The buyer is tempted to purchase the
products, even if he does not need or afford to buy the product.
(3) Heavy Risk:
The seller runs a heavy risk under such system, though he has the right to take back the articles from the
defaulting customers. The second-hand goods fetch little price.
(4) Difficulties in Recovery of Installments:
It has been observed that the sellers do not get the installments from the purchasers on time. They may
choose wrong buyers which may put them in trouble. They have to waste time and incur extra
expenditure for the recovery of the installments. This sometimes leads to serious conflicts between the
buyers and the sellers.
(5) Break Up of Families:
The system puts a great financial burden on the families which cannot afford to buy costly and luxurious
items. Recent studies in western countries have revealed that thousands of happy homes and families
have been broken by hire purchase buying’s.

Termination of hire purchase agreements

The circumstances listed below are grounds for termination of any type of hire purchase agreement.
 The terms of the written contract
The agreement states the various scenarios where both parties can discontinue the agreement. Most
contracts mention the return of the asset by the buyer, the seller’s notice of termination in case of breach
of terms and conditions, and the hirer’s notice of termination of the contract as the legal circumstances
permitting termination.
 Renewal of the agreement
Both parties negotiate a new contract and terminate the initial credit agreement.
 Notice of termination
Either the buyer or seller can give a notice requesting the termination of the hire purchase agreement.
 Full repayment
The agreement is considered null and void once the buyer settles their debt.
 Release of one party from the agreement
The seller may release the hirer from the contract on various grounds. These reasons may be the full
repayment or breach of contract.
 Time-lapse
The buyer is given a period to pay for the asset in full but fails to.
 Frustration
The terms and conditions stipulated in the agreement are not met because of some act or event. The
contract is discontinued, and both parties are released from the obligations of the hire purchase
agreement.

Legal Provisions of Hire Purchase System & Contents

Legal Provisions:
The Hire Purchase System is regulated by the Hire Purchase Act 1972. Under Section 2(c) of the
Act, “Hire Purchase Agreement means an agreement under which goods are let on hire and under
which the hirer has an option to purchase them in accordance with the terms of the agreement
and includes an agreement under which:
(i) Possession of goods is delivered by the owner thereof to a person on condition that such person pay
the agreed amount in periodical installments, and
(ii) The property in the goods is to pass to such person on the payment of the last of such installments,
and
(iii) Such person has a right to terminate the Agreement at any time before the property so passes.”
Every Hire Purchase Agreement must be in writing and signed by all the parties thereto. (Section 3)

Contents of Hire Purchase Agreement:

According to Section 4 of the Act, every hire purchase agreement shall contain the following
particulars:

(a) The hire purchase price of the goods to which the agreement relates;
(b) The cash price of the goods, that is to say, the price at which the goods may be purchased by the
hirer for cash;
(c) The date on which the agreement shall be deemed to have commenced;
(d) The number of installments by which the hire purchase price is to be paid, the amount of cash of
those installments, and the date, or the mode of determining the date, upon which it is payable, and the
person to whom and the place where it is payable; and
(e) The goods to which the agreement relates, in the manner sufficient to identify them.