INTRODUCTION

Hire purchase is an arrangement for buying expensive consumer goods, where the
buyer makes an initial down payment and pays the balance plus interest in
installments. The term hire purchase is commonly used in the United Kingdom and
it's more commonly known as an installment plan in the United States. However,
there can be a difference between the two: With some installment plans, the buyer
gets the ownership rights as soon as the contract is signed with the seller. With hire
purchase agreements, the ownership of the merchandise is not officially transferred
to the buyer until all the payments have been made.

Hire purchase refers to the arrangement made mostly between two parties in which
one party wants to buy some expensive asset by paying the amount in various
installments and therefore, it is a kind of arrangement where the purchaser agrees
to pay some amount (known as a down payment) to the supplier at the time of
purchase and the balance amount is paid in various installments along with the
interest that is charged some fixed percentage.

Hire purchase is the legal term for a contract, in which persons usually agree to pay
for goods in parts or a percentage at a time. It was developed in the United
Kingdom and can now be found in Australia, China, India, Jamaica, Japan,
Malaysia, New Zealand, and South Africa. It is also called closed-end leasing. In
cases where a buyer cannot afford to pay the asked price for an item of property as
a lump sum but can afford to pay a percentage as a deposit, a hire-purchase
contract allows the buyer to hire the goods for a monthly rent. When a sum equal
to the original full price plus interest has been paid in equal installments, the buyer
may then exercise an option to buy the goods at a predetermined price (usually a
nominal sum) or return the goods to the owner. In Canada and the United States, a
hire purchase is termed an installment plan; other analogous practices are described
as closed-end leasing or rent to own.

If the buyer defaults in paying the installments, the owner may repossess the
goods, a vendor protection not available with unsecured-consumer-credit systems.
HP is frequently advantageous to consumers because it spreads the cost of
expensive items over an extended time period. Business consumers may find the
different balance sheet and taxation treatment of hire-purchased goods beneficial to
their taxable income. The need for HP is reduced when consumers have collateral
or other forms of credit readily available.
 RESEARCH QUESTIONS

1. How does hiring purchase work?

2. What is the hire purchase agreement?
3. What are the advantages and disadvantages of hire purchasing?

LITERATURE REVIEW

Hire-purchase system is a special system of purchase and sale of goods. Under this
system purchaser pays the price of the goods in installments. The installments may
be annual, six monthly, quarterly, monthly fortnightly etc. Under this system the
goods are delivered to the purchaser at the time of agreement before the payment
of installments but the title on the goods is transferred after the payment of all
installments as per the hire-purchase agreement. The special feature of a hire-
purchase transaction is that the payment of every installment is treated as the
payment of hire charges by the purchaser to the hire vendor till the payment of the
last installment.. After the payment of the last installment, the amount of various
installments paid is appropriated towards the payment of the price of the goods
sold and the ownership or the goods is transferred to the purchaser. Thus hire-
purchase means a transaction where the goods are sold by vendor to the purchaser

under

the following conditions:

The goods will be delivered to the purchaser at the time of agreement.

The purchaser has a right to use the goods delivered.
The price of the goods will be paid in installments.
 Every installment will be treated to be the hire charges of the goods which
are being used by the purchaser.
If all installments are paid as per the terms of agreement, the title of the
goods is transferred by vendor to the purchaser.
If there is a default in the payment of any of the installments, the vendor
will take away the goods from the possession of the purchaser without
refunding him any amount received earlier in the form of various
installments

HISTORY OF HIRE PURCHASE

Hire purchase has been there in India for more than 6 decades. The first hire
purchase company is believed to be Commercial Credit Corporation, successor to
Auto Supply Company. This company was based in Madras. In north India, Motor
and General Finance and Installment Supply Company was set up. This was
around 1925.

Consumer durables hire purchase was promoted by the dealers in the equipment.
Singer Sewing Machine or Murphy radio dealers would provide installment
facilities on hire purchase basis to the customers of their products. Hire purchase of
commercial vehicles also has flourished fast.

FEATURES AND BENEFITS OF A HIRE PURCHASE

When you enter into a hire purchase arrangement, your financier is agreeing to
purchase equipment – or a vehicle – on your behalf, and then hire it back to you
over a set term. This means you have the use of the vehicle during that term, but
don't own it.

Other features of a hire purchase include:

 A loan term of between three and five years. As part of the hire agreement you can
choose how long you want to hire your vehicle back for.

You own the vehicle at the end. At the end of a hire purchase agreement,
once you have made your final payment and any balloon payment you
implemented, the vehicle is automatically yours.

​ Upfront costs. When you first enter into a hire purchase you will need to
make an initial loan payment and pay a deposit, stamp duty and registration
fees. In some cases you can negotiate that some of these fees be added to the
hire amount.
​ Full monthly repayments. The monthly repayments due on your hire
purchase will be calculated on the total amount of the purchase price, plus
interest charges, duties and other loan fees.
​ Do you want a balloon? With a hire purchase you can choose whether or not
to have a balloon payment due at the end of the loan term. Having a balloon
payment will lower your monthly repayments, but this amount will be
payable at the end of the term, and you need it to correlate to the market
value of the vehicle at the time.
​ More expensive insurance. When you are hiring a vehicle rather than
buying it outright, your insurance company can often impose higher
premiums.
​ Keep, sell or refinance your hire purchase. At the end of the hire purchase
term you can keep the car after you make your final payment and pay out
any balloon. You can also sell or trade in the vehicle, but the risk of risk of
dropping value now becomes yours. Or you can refinance the balloon
amount over a new term if you want to keep the vehicle for a few more
years.
​ Unlimited miles. There are no limits to the miles you can put on the clock
with a hired vehicle, but just keep in mind that the more miles the vehicle
has, the lower its value will be at the end of the hire term.
​ Tax benefits. With a hired vehicle you are able to claim depreciation of the
purchase price, plus the interest charges on your loan, and the ongoing
running costs of the vehicle, based on the percentage of business use.
 ADVANTAGES AND DISADVANTAGE OF HIRE PURCHASE

ADVANTAGES OF HIRE PURCHASE

Spread the cost of finance. Whilst choosing to pay in cash is preferable, this might
not be possible for consumers on a tight budget. A hire purchase agreement allows
a consumer to make monthly repayments over a pre-specified period of time.

1) Interest-free credit

Some merchants offer customers the opportunity to pay for goods and services on
interest free credit. This is particularly common when making a new car purchase
or on white goods during an economic downturn.

2) Higher acceptance rates

The rate of acceptance on hire purchase agreements is higher than other forms of
unsecured borrowing because the lenders have collateral;

3) Sales

A hire purchase agreement allows a consumer to purchase sale items when they
aren't in a position to pay in cash. The discounts secured will save many families
money;

4) Debt solutions

Consumers that buy on credit can pursue a debt solution, such as a debt
management plan, should they experience money problems further down the line.
DISADVANTAGES OF HIRE PURCHASE

1) Personal debt

A hire purchase agreement is yet another form of personal debt; it is a monthly

repayment commitment that needs to be paid each month.

2) Final payment

A consumer doesn't have legitimate title to the goods until the final monthly
repayment has been made.

3) Bad credit.

All hire purchase agreements will involve a credit check. Consumers that have a
bad credit rating will either be turned down or will be asked to pay a high interest
rate;

4) Creditor harassment

Opting to buy on credit can create money problems should a family experience a
change of personal circumstances.

5) Repossession rights

A seller is entitled to 'snatch back' any goods when less than a third of the amount
has been paid back. Should more than a third of the amount have been paid back,
the seller will need a court order or for the buyer to return the item voluntarily.
DIFFERENT METHOD OF HIRE PURCHASE

FUNCTION

Hire purchases are used to acquire houses, automobiles, furniture, and other large
items that generally cannot be paid in a lump sum. Hire purchases function as legal
documents for which the lender can legally hold the title until the item is paid in
full.

TYPES

A hire purchase can be an installment or deferred payment plan. In the former, a set
monthly payment is paid on a certain day each month for a specified length of
time. After the last payment, the item becomes the purchaser's property. In the
latter, the property immediately belongs to the purchaser while payments are
regularly made.

TIME FRAME

A hire purchase can be for a few months up to many years. The interest rate can
vary from low to high, depending on the institution granting the agreement.
Usually, a more expensive item will be set up for 10, 15, or more years. Typically,
a mortgage covers a span of 30 years.

FACTS

To be valid, a hire purchase must be signed by both parties. It should contain a

description of the item, the price paid, the deposit (if any), monthly amounts due,
statement of each party's rights, and requirements, if any, for early termination.

BENEFITS

Hire purchase allows a person to buy an item, such as a house, over a long period
of time. With such an agreement, the buyer can enjoy his property while making
payments. The buyer also has the right to sell the property and allow the new
purchaser possession of his house.

WARNING

If the purchaser fails to make the installments in a timely manner, the lender has
the right to repossess the property or item. In severe cases, the purchaser may file
for foreclosure or bankruptcy, at which time the item's ownership will be returned
to the lender.

CONSIDERATIONS

Generally, a person must be at least 18 years of age to enter into a valid hire
purchase. There is no upper age limit to incurring such a purchase agreement. Each
person should carefully consider his financial position before incurring any type of
hire purchase.

STANDARD PROVISIONS OF HIRE PURCHASE

To be valid, HP agreements must be in writing and signed by both [parties].They

must clearly lay out the following information in a print that all can read without
effort:

1. A clear description of the goods 2. The cash price for the goods

3. The HP price, i.e., the total sum that must be paid to hire and then purchase the
goods

4. The deposit

5. The monthly installments (most states require that the applicable interest rate is
disclosed and regulate the rates and charges that can be applied in HP transactions).

6. A reasonably comprehensive statement of the parties' rights (sometimes

including the right to cancel the agreement during a "cooling-off" period).

7. The right of the hire to terminate the contract when he feels like doing so with a
valid reason.
THE SELLER AND THE OWNER

If the seller has the resources and the legal right to sell the goods on credit (which
usually depends on a licensing system in most countries), the seller and the owner
will be the same person. But most sellers prefer to receive a cash payment
immediately. To achieve this, the seller transfers ownership of the goods to a
Finance Company, usually at a discounted price, and it is this company that hires
and sells the goods to the buyer. This introduction of a third party complicates the
transaction. Suppose that the seller makes false claims as to the quality and
reliability of the goods that induce the buyer to "buy". In a conventional contract of
sale, the seller will be liable to the buyer if these representations prove false. But,
in this instance, the seller who makes the representation is not the owner who sells
the goods to the buyer only after all the installments have been paid. To combat
this, some jurisdictions, including Ireland, make the seller and the finance house
jointly and severally liable to answer for breaches of the purchase contract

Implied warranties and conditions to protect the hirer

The extent to which buyers are protected varies from jurisdiction to jurisdiction,
but the following are usually present:

1. The hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will
interfere with the hirer's possession during the term of this contract

2. The owner will be able to pass title to, or ownership of, the goods when the
contract requires it

3. That the goods are of merchantable quality and fit for their purpose, save that
exclusion clauses may, to a greater or lesser extent, limit the Finance Company's
liability Where the goods are let by reference to a description or to a sample, what
is actually supplied must correspond with the description and the sample.
THE HIRER'S RIGHTS

The hirer usually has the following rights:

1. To buy the goods at any time by giving notice to the owner and paying the
balance of the HP price less a rebate (each jurisdiction has a different formula for
calculating the amount of this rebate)

2. To return the goods to the owner — this is subject to the payment of a penalty to
reflect the owner's loss of profit but subject to a maximum specified in each
jurisdiction's law to strike a balance between the need for the buyer to minimize
liability and the fact that the owner now has possession of an obsolescent asset of
reduced value

3. with the consent of the owner, to assign both the benefit and the burden of the
contract to a third person. The owner cannot unreasonably refuse consent where
the nominated third party has good credit rating

4. Where the owner wrongfully repossesses the goods, either to recover the goods
plus damages for loss of quiet possession or to damages representing the value of
the goods lost.

THE HIRER'S OBLIGATIONS

The hirer usually has the following obligations:

1. To pay the hire installments

2. To take reasonable care of the goods (if the hirer damages the goods by using
them in a non-standard way, he or she must continue to pay the installments and, if
appropriate, compensate the owner for any loss in asset value)

3. To inform the owner where the goods will be kept.

4. A hirer can sell the products if, and only if, he has purchased the goods finally or
else not to any other third party.
It is pretty much similar to installment but the main difference is of ownership.

THE OWNER'S RIGHTS

The owner usually has the right to terminate the agreement where the hirer defaults
in paying the installments or breaches any of the other terms in the agreement. This
entitles the owner:

1. To forfeit the deposit

2. To retain the installments already paid and recover the balance due

3. To repossess the goods (which may have to be by application to a Court

depending on the nature of the goods and the percentage of the total price paid)

4. To claim damages for any loss suffered

HIRE PURCHASE AGREEMENT

HIRE AND PURCHASE AGREEMENT is a contract (more fully called contract

of hire with an option of purchase) in which a person hires goods for a specified
period and at a fixed rent, with the added condition that if he shall retain the goods
for the full period and pay all the installments of rent as they become due the
contract shall determine and the title vest absolutely in him, and that if he chooses
he may at any time during the term surrender the goods and be quit of any liability
for future installments upon the contract. In the United States such a contract is
generally treated as a conditional sale, and the term hire purchase is also sometimes
applied to a contract in which the hirer is not free to avoid future liability by
surrender of the goods. In England, however, if the hirer does not have this right
the contract is a sale.

Agreement includes:-

Possession of goods is delivered by the owner thereof to a person on condition that

such person pays the agreed amount in periodical installments.
The property in the goods is to pass to such person on the payment of the last of
such installments

Such a person has a right to terminate the agreement at any time before the
property passes.

―Hire-Purchase Price‖ means the total sum payable by the hirer under a hire-
purchase agreement in order to complete the purchase of, or the acquisition of
property in, the good to which the agreement relates and includes and sum so
payable by the hirer under hire-purchase agreement by way of a deposit or other
initial payment, or credited or to be credited to him under such agreement on
account of any such deposit or payment, whether that sum is to be or has been paid
to the owner or to any other person or is to be or has been discharged by payment

of money or by transfer or delivery of goods or by any other means; but does not
include any sum payable as a penalty or as compensation or damages for breach of
the agreement.

―Hirer‖ means the person who obtains or has obtained possession of goods from
an owner under a hire-purchase agreement, and includes a person to whom the
hirer‘s rights or liabilities under the agreement have passed by agreement or by
operation of law.

―Owner‖ means the person who lets or has let, delivers or has delivered
possession of goods; to a hirer under a hire-purchase agreement have passed and
includes a person to whom the owner‘s property in the goods or any of the owner‘s
right or liabilities under the agreement has passed by the assignment or by
operation of law.

Hire Purchase Agreement Participants

1) The Finance Company

The customer agrees with the finance company to use the vehicle for a certain
period, provided there is settlement of initial fees. When the payments are fully
made, the customer has the option of car ownership by purchasing it by also paying
the Option to Purchase fee.

2) The Dealer

The dealer is the middle man with whom the customer makes the initial
arrangement. He sends the draft of the sale to the finance company. Once accepted,
the contract will be signed by the customer and the finance company will be
invoiced by the dealer. In essence, the finance company pays for the purchase and
allows the customer to use the it. The latter in turn, pays the company on an agreed
term.

3) Customer (Debtor)

The customer is a main participant in the agreement as he is the ultimate owner of

the purchased unit once he has paid it in full subject to the agreed conditions.

In order to conclude a Hire Purchase Agreement, one of the following has to take
place:

• Early Settlement

Once the customer is able to pay the full settlement and has decided to pay the loan
in full even ahead of the agreed time, he may do so at any time. The customer also
needs to pay to the lender the Option to Purchase fee. Depending on the lender, he
may give the buyer a rebate on the unused interest. But the minimum amount of the
rebate is dictated by law if the agreement is regulated by Consumer Credit Act.

• End of Contract/ Agreement

When all the agreed payments are made at the end of the contract for Hire
Purchase, the customer usually pays the Option to Purchase fee and then be the
legal owner of the unit. But even when the car was fully paid, it can be returned if
the buyer wants to. A fee will be set by the finance company, a minimum of £1
without any maximum limit.

4) Charges / Fees

Usually, finance companies charge a starting fee, often known for different terms
such as set up fee, administration fee, facility fee or documentation fee. And the
final payment is the Option to Purchase fee which signals the official transfer of
the goods to the buyer. With Hire Purchase Agreements, no mileage condition is in
effect.

Prior to entering the Personal Contract Purchase, take note of the following:

1. A Hire Purchase Agreement is a contract between a debtor (customer) and a

lender (Finance Company). At the end of the agreement or at any point before that,
the debtor has the option to own the purchased goods.

2. The customer may pay a deposit plus interest. The remaining amount and other
interests may be settled over a certain fixed period.

3. Other fees, such as facility fee or acceptance fee may be included in the contract.
4. Up until the customer settles the Option to Purchase fee, the title remains in the
hands of the Finance Company.

CONCLUSION
In today‘s world, asset based financing has formed an integral part of the Financing
scenario. This is because firms today can‘t afford to buy the equipment and
machinery outright. At present not all firms are that financially sound. Firms find it
extremely difficult to obtain the financial aid from the normal sources. Firms that
have the financial capacity prefer to hire or lease the equipment, it releases the
financial burden as well as provides tax benefit of depreciation. Project financing
has come of age as most of the banks today are into project financing. Earlier, it
was chartered accountants who indulged into project financing but now it is more
of bank involvement. But today the growth in Project Finance is low whereas lease
and hire purchase are on an upward trend with more and more companies
providing their products on hire. So in the changing economic and financial
environment of India, hire purchase financing has assumed an extremely important
role.

BIBLIOGRAPHY
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Wikipedia