Hire purchase is a method of buying expensive goods through installment payments over time rather than paying the full amount up front. Under a hire purchase agreement, possession of the goods is transferred immediately but ownership remains with the owner, usually a finance company, until the final installment is paid. Key characteristics include possession of goods, ownership transferring upon full payment, installment buying, and expanding the economy by providing financing options. The hire purchase process involves the dealer arranging financing through a finance company, with the customer making a down payment and paying the balance in monthly installments over several years, at which point ownership transfers to the buyer.

1. SRUTHI R
MACFAST

2. Hire Purchase
 Hire purchase is used to buy expensive items which a
person cannot afford to payout right: e.g. a car
 A down payment is usually paid and the balance is
paid over several months (monthly instalments).
What is hire purchase ?
 Here possession of goods is transferred
immediately, but payment is made in installments.
 Ownership is transferred after all the installments
have been paid

3. characteristics
 ‡ Possession‡
 Ownership upon the full payment‡
 Installment buying‡
 Social innovation‡
 Expands economy‡
 Additional income

4. Definition
 According to hire purchase act of 1972.³Anagreement
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.

5. Operation of HP transaction
 Goods are let out on finance by a finance company to the
hire purchaser customer
 Buyer is required to pay an equal amount of periodic
installments during a given period
 Ownership transfers at the payment of the last installment
 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 36-48months‡
 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.

6. Cont……
 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.

7. Process of Hire Purchase
 The Dealer, contracts with finance co. for financing his hire
purchase deals.
 The customer selects the goods for HP, and dealer arranges for
the complete set of documents.
 Down payment by customer on completion of proposal form.
 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 finance co.

8. Advantages disadvantages
 ‡‡ Reputed buyers
 ‡ No immediate cash‡
 May lead to
 Easy possession‡ bankruptcy‡
 Economic growth‡  Buyer has to mortgage
 Thrift‡ his property
 Relief to buyer  ‡ Buyer may incur loss‡
 May lose paid
installments in the event
of default‡
 It is expensive‡
 Loss to seller in the event
of default by the buyer.

9. Eligibility to enter into
HPtransactions
 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.

10. MATHEMATICS OF HIRE
PURCHASE
1)Down payment plan
 The rate of interest on the hire purchase contractis always a
flat rate.
n
i =……….2f
n+1
2) Deposit linked plan
 if installments are paid in advance ,the relationship
between I & f changes.
n
I =……………2f
n-1

11. 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.
 Sales tax can’t be loevied on hire purchase transactions structured by finance
companies.
 There is no uniform rate of sales tax applicable to hire purchase. it vary from
state to 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 chargeable interest.