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‡
The property of the goods is to pass to such a
person on the payment of the last installment.‡
Such a person has a right to terminate the
agreement any time before the property so passes.
Flat Rate of Interest
Effective Rate of Interest
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 3648months‡
Alternatively, instead of the down
payment, the hirer as to deposit an equal
amount as a fixed deposit with the finance
company which provides entire finance on
hire purchase terms, repayable with interest
in EMI over 36-48 months.
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.
The Dealer, contracts with finance co. for financing his hire
The customer selects the goods for HP, and dealer
arranges for the complete set of documents.
Down payment by customer on completion of proposal
Dealer sends documents to finance co. with request to
purchase the goods, and accept the HP transaction.
The finance co. signs the agreement and sends copy along
with EMI details to dealer.
Dealer delivers the goods to the customer, property
passes on to the finance co..
Hirer pays EMIs, and on last payment , the ownership
passes on to him, with loan completion certificate by the
‡ No immediate cash‡
Relief to buyer
May lead to bankruptcy‡
Buyer has to mortgage
‡ Buyer may incur loss‡
May lose paid
installments in the event
It is expensive‡
Loss to seller in the event
of default by the buyer.
For the HirerCost of Hire Purchase isDown payment + service charges + PV of hire
purchase payments (Kd) – PV of depreciation tax
shield (Kc) – PV of net salvage value (Kc)
For the vendorNPV of hire purchases plan
-PV of hire purchase instalment
+documentation and service fee
+ PV of tax shield on initial direct cost
PV of interest tax of financial income.
PV of interest tax of financial documentation.
TAX CONSIDERATION OF HIREPURCHASE:INCOME TAX ASPECT
it is governed by central board of direct
taxes(CBDT) in 1943.
This circular specifies that the hirer is entitled to
the tax shield on depreciation ,which is
calculated with reference to the cash purchase
price & tax shield on the consideration for hire.
SALES TAX ASPECT
A sale is deemed to take place only when the
hirer exercises an option to purchase.
Sales tax amount must be fixed with
depreciated value of goods.
There is no uniform rate of sales tax
applicable to hire purchase. it vary from state
INTEREST RATE ASPECT
It is payable on the total amount of interest
aggregating to a hire purchase company in
the previous year at the rate of 3%.
Payable amount of interest established during
the previous year can be deducted from
debt that someone incurs for the purpose of
purchasing a good or service. This includes
purchases made on credit cards, lines of credit
and some loans.
Also referred to as "consumer debt".
•Includes all asset based financing plans offered
to individuals. ( eg. Cars, scooters , VCRs, TVs,
Refrigerators, washing machines etc., personal
supplier of consumer credit are
Multinational Banks, commercial banks , Finance
Parties to the transaction: Bipartite arrangement
- two parties viz borrower/consumer and
Tripartite Transaction-dealer, financier, and customer.
The dealer arranges the credit from the financier.
Structure of the transaction: Hire-Purchase , Conditional
Sale , Credit Sale .
Hire Purchase -Most tripartite consumer credit
transactions are of this type. Customer option to
purchase the asset on completion of the pay back
Conditional Sale :Ownership not transferred until
full payment of purchase price, including the
credit charge. The customer cannot terminate the
Credit Sale: Ownership transferred to the customer
on first instalment payment. But the agreement
cannot be cancelled.
Payment Period and ROI:
Payment period - 12 -60 months.
ROI - generally flat rate Effective Rates generally
not disclosed. Sometimes in place of ROI, the EMI
for different payment periods is mentioned.
Security : First charge on assets. The
consumer cannot sell the hypothecated asset.
Evaluation: Can be made with Effective Rate
of Interest and rebates for early repayments.
Unrealistic life style
Can ruin credit