2. DEFINITION ..
▪ Hire Purchase System is a system in which the hirer
(hire purchaser) buys a good from the seller (hire vendor)
but does not make a full payment at one time. However,
makes a lumpsum amount as a down payment and the
remaining amount will be paid in installments by the hirer.
▪ Goods are delivered to the purchaser at the time of Hire
Purchase Agreement but purchaser will become the
owner of goods only on the payment of the last
installments. All the installments paid are treated as hire
till the last installment is paid off.
3. PARTIES INVOLVED …
1. Hirer: A “Hirer” in general terms implies the buyer of a
good or a person who obtains a good from the owner or the
seller under hire purchase system.
2. HireVendor: A “HireVendor” is an owner or seller of the
good who delivers the goods to the hirer under a hire purchase
system.
4. FORMULAS ..
1. To calculate the hire purchase price..
2.To calculate Cash Price Installments..
5. Contents of Hire Purchase Agreement
▪ According to the Hire Purchase Act, 1972 (Section 4), the following
contents should be mandatorily mentioned in a hire purchase agreement:
▪ Description of goods.
▪ Selling price of the goods sold.
▪ Actual cash price of the goods sold.
▪ Date and time of agreement initiation.
▪ Amount and number of installments to be paid by the hirer with interest.
▪ Last date till all installments should be paid off.
▪ The name of the person to whom the installment is payable.
6. Features of Hire Purchase System..
▪ Act: It is regulated by the Hire PurchaseAct, 1972.
▪ Parties: It is an agreement amidst hirer and hire vendor for hiring an asset.
▪ Claiming rights: In case hirer fails to make a payment, hire vendor can sue
or claim only for the return of the asset and not for the remaining due
installment payments.
▪ Selling Rights: Hirer cannot sell or mortgage the hired asset until
ownership gets transferred to the them.
▪ Loss bearer: Hire vendor remains liable for any loss of goods until
ownership gets transferred to the hirer.
7. Advantages of Hire Purchase System..
1. Buying an asset becomes much easier for the hirer by making
payments in easy installments.
2. After paying all the installments, the hirer can enjoy the
ownership of the asset.
3. Hirer can claim the depreciation benefits on the hired assets.
4. Hirer can enjoy the tax benefits over the interest payable by
them on hire purchased goods.
5. Hire purchase system is beneficial for the vendors too as it
increases their sales volume.
8. Disadvantages of Hire Purchase System..
▪ Total amount paid towards the asset in case of hire purchase
system is higher than the cash price of assets.
▪ Ownership of assets is transferred only at the end of the hire
purchase agreement. The hirer cannot sale or transfers the asset
till then.
▪ If the hired asset is no longer needed because of any change in
the business strategy, there may be a resulting penalty for seller.
▪ Hire purchase contracts are usually fixed, therefore if you find
yourself in financial difficulty during that period, you may lose the
asset and damage your credit rating.
9. CONCLUSION ..
▪ Hire purchase system is a credit purchase system in
which hirer buys goods from the hire vendor on credit
and makes payment on installments. Although the hirer
gets the possession of the goods from the date of the
agreement; however, the ownership of the asset only
gets transferred with the last installment payment, till
then the hire vendor holds the right of ownership of the
asset.
