Hire purchase is a form of financing where goods are leased with the option to purchase. Key aspects include: - Payments are made in installments over a set period, with possession given initially but ownership transferring after the final payment. - If payments are defaulted on, the seller can repossess the goods. The hirer can also return goods before completing payments. - A hire purchase agreement has aspects of both a bailment for the lease period and a sale when the purchase option is exercised. - Ownership transfers to the hirer on the final payment, but the financier retains ownership until then despite the hirer controlling the goods.

1. Meaning and Characteristic of Hire
Purchase Finance
Historically the hire-purchase finance has been associated with
financing of commercial vehicles for road transporter operator.

2. Hire-Purchase has emerged as a source of equipment financing in recent years
as an alternative to lease financing.
A Hire-Purchase transaction in which the goods are let out on hire with the
option to the hirer to purchase them, with following stipulations:
• Payment to be made in installment over a specified period.
• The possession is delivered to the hirer at the time of entering into the
contract;
• The property in the goods passes to the hirer on payment of the last
installment;
• Each installment is treated as hire charges so that if default is made in
payment of any installment, the seller becomes entitled to take away the
goods; and
• The hirer is free to return the goods without being required to pay any
further installment falling due after the return.

3. Aspects of hire purchase agreement
A hire-purchase agreement has two aspects:
• Firstly, an aspect of bailment of goods subject to hirepurchase agreement,
• Secondly, an element of sale which fructifies when the option
to purchase is exercised by the intending purchaser. Though
the option to purchase is allowed in the beginning, it can be
exercised only at the end of the agreement.

4. Installment Sale & its Payment
• In an Installment sale, the contract of sale is
entered into, the goods are delivered and the
ownership is transferred to the buyer but the
price of the goods is paid in specified
installments over a definite period.
• In installment sale the ownership in the goods
passed on to the purchaser simultaneously
with the payment of the initial/first
installment.

5. Aspects of ownership & depreciation
• The ownership of the asset passes on the user (hirer) in case
of hire-purchase finance on the payment of the last
installment. However, before the payment of the last
installment, the ownership of the asset vests in the finance
company/intermediary (seller).
• Hirer is entitled to take the availing of benefit of depreciation.

6. Size of cost of acquisition, and margin
money
• Usually the cost of acquisition under hire-purchase is not of
very high value.
• In a hire-purchase transaction a margin money equal to 20 to
25 per cent of the cost of the asset is required to be paid by
the hirer. Alternatively, the hirer has to invest an equivalent
amount on fixed deposit with the finance company which is
returned after the payment of the last installment.

7. Maintenance of hired asset and tax
benefits to hirer and seller
• The maintenance of the hired asset is borne
by the hirer.
• The hirer is allowed to the depreciation claim
and finance charge and the seller may claim
interest on borrowed funds to acquire the for
tax purposes.

8. Parties to Hire-Purchase contract
• There are two parties in hire-purchase
contract:
• The intending seller (Hire Vendor) and the
intending purchaser( the hirer).
• In some of the hire-purchase contract, there
are three parties: the seller, the financier and
the hirer. Now a days a dealer arrange a hirepurchase agreement through a finance
company with the customer.

9. Law Governing the hire-purchase
contract, agreement, & transactions
• In the absence of specific law, the hire-purchase
transactions are governed by the provisions of
the Indian Contract Act & the Sales of Goods Act.
• The hire-purchase agreement has two aspects:
• An aspect of bailment of the goods which is
covered by the Contract Act, and other one is sale
when the option to purchase is exercised by the
hirer which is covered by Sales of Goods Act.

10. Essential elements of a Sale
• Two parties: buyer & seller, both competent to
contract to effectuate the sale.
• Goods, that is the subject-matter to be
transferred from the seller to the buyer.
• Money consideration: Price for the goods.
• Transfer of ownership of the property in the
goods from the seller to the buyer.
• Essentials of a valid contract under the Indian
Contract Act.

11. Important clauses of Hire Purchase
Agreement
• Nature of the Agreement: Stating the
nature, terms & commencement of the
agreement.
• Delivery of Equipment: The place & time of
delivery and the hirer’s liability to bear delivery
charges.
• Location: The place where the equipment shall be
kept during the period of hire.
• Hire-Charges: To be paid by hirer, the time
schedule, the rate of interest/penalty for delayed
payment/default.

12. • Insurance: The hirer to obtain at his cost
insurance on the equipment and to hand over
the insurance policy to the hire-vendor.
• Repair: The hirer has to undertake the repair
of the hired asset.
• Alternation: The hirer not to make any
alternations, additions and so on to the
• equipment, without prior consent of the hirevendor.

13. • Termination: The events or acts of hirer that would
constitutes a default eligible to terminate the agreement.
• Risk: Of loss and damage to be borne by the hirer.
• Registration and Fees: The hirer to comply with the relevant
laws, registration and bear all requisite fees.
• Schedule of equipment forming subject-matter of the
agreement.
• Schedule of hire charges.
• Indemnity clause and Stamp Duty