Meaning of Hire Purchase Essential Features of Hire Purchase System Meaning of Installment Purchase System Features of Installment Purchase System Important Terms and Provisions under Hire Purchase

1. HIRE PURCHASE SYSTEM
Dr. Panduranganagouda Honnali
Assistant Professor
Department of Professional Accounting and Finance
Kristu Jayanti College (Autonomous)
Bangalore – 560077

2. HIRE PURCHASE SYSTEM
Introduction
• When goods are sold on credit, for which payment is made by
the buyer in installments over a period of time, it is called Hire
Purchase System or Installment System.
• Hire Purchase and Installment Purchase are two common
methods of financing purchases. Both involve paying for
goods over time, but there are some important differences
between them. In this presentation, we will explore these
differences and their implications for consumers

3. • Hire Purchase is a type of financing where the
buyer pays for an item in installments while using
it. The buyer does not own the item until the final
payment is made.
• This method is commonly used for purchasing
cars, furniture, and other large items. The
interest rates are typically higher than other
types of financing
Meaning of Hire Purchase

4. • “Hire purchase is an arrangement for buying expensive goods, where the
buyer makes an initial down payment and pays the balance plus interest in
installments.”
Meaning of Hire Purchase

5. The system of hire purchase can be better understood with the help of its
features. The following are the characteristic features of hire purchase
system.
• Hire purchase is an agreement between two parties called Hire vendor
and Hire purchaser.
• The agreement provides for parting the possession of goods, by the seller,
with an option to purchase or hires the goods by buyer.
• Payment for the goods will be made by the hire purchaser in installments.
• If the hire purchaser pays all the installments, the ownership of the goods
will be
• transferred on payment of last installment, resulting the transaction in
'purchase,'
Essential Features of Hire Purchase System

6. • If the hire purchaser stops paying the installments, the hire
vendor repossesses the goods,
• the resulting the transaction in 'hire.' In such case, each earlier
installment paid will be treated as hire charges.
• In case of the transaction resulting in purchase, each
installment paid will be inclusive of
(a) Payment towards price of the goods (i.e., principal
amount) and
(b) Payment of interest.
Essential Features of Hire Purchase System

8. Meaning of Installment Purchase System
Installment payment system (also called the Deferred installments) is a system
where the buyer given the ownership as well as the possession of the goods at the
time of signing the contract. Buyer has the facility to pay the price in
installments.
According to Carter, "Under Installment system, property in goods or
ownership is transferred to the buyer immediately, though he has to make
payment in many years. If the buyer is unable to make payment of any
installment, vendor cannot take back the goods, he can only file suit for recovery
of amount."

9. • Installment Purchase is a type of
financing where the buyer pays for an
item in installments and owns it from the
beginning. The buyer can use the item
while making payments.
• This method is commonly used for
purchasing electronics, appliances, and
other smaller items. The interest rates are
typically lower than Hire Purchase.
Meaning Installment Purchase System

10. The features of Installment payment system are as follows:
• Under this system, there will be an outright sale of goods/assets
• The possession as well as the ownership is passed on to the buyer right at the time
of signing the contract.
• The buyer can make the payment in installments.
• In case of default in payment, the seller cannot repossess the goods, but he can sue
the buyer for the recovery of unpaid price.
• The buyer cannot exercise the option of returning the goods and terminate the
contract, unless the same becomes void or voidable under the contract act.
Features of Installment Purchase System

17. Important Terms and Provisions under Hire Purchase
Hire purchaser: Hire purchaser is a person who obtains the possession of
goods for use with an option to either purchase it or return after use.
Hire vendor: Hire vendor is a person who owns the goods, and who parts
with the possession of these goods to the buyer with an option of 'Purchase
or hire.
Cash price: It refers to the price at which goods are sold under 'Contract of
Sale(It is the price at which the purchaser can purchase the goods by
paying full cash at the time of purchase.)
Hire Purchase price: It refers to the price at which the goods are sold
under 'Hire Purchase System .It includes cash price of the goods and
interest.
Installment money: It refers to a part of Hire purchase price paid by hire
purchaser, in period intervals.

18. Deposit: It means any sum payable by the hirer (i.e. hire purchaser)
under the hire purchase agreement by way of deposit or other initial
payment or credited or to be credited to him and the agreement on
account of any such deposit or payment,
whether that sum is to be or has be discharged by payment of money or
by transfer or delivery of goods or by any other means,
In normal term, it is also called 'down payment i.e.
“payment made by hire purchaser to his vendor at the time of taking
delivery of goods or at the time of signing hire purchase agreement.”

20. • Net Cash price: It refers to the difference between cash price of the goods and the
deposit of the down payment). It is the amount on which, interest is calculated
under hire purchase system.
• Net Hire Purchase price: It refers to the hire purchase price of the goods less
• (a) Delivery charges, if any (included in the price);
• (b) Registration charges, if any (included in the price); and
• (c) Insurance charges, if any (included in the price).

21. • Hire Purchase charges: It refers to the difference between net hire purchase
price and net price of the goods. It is also referred to as interest.

22. TERMINATION OF HIRE PURCHASE
AGREEMENT
• The Hirer(hire purchaser) can terminate the agreement at any time
giving 14 days notice to the owner.
• However the agreement may impose severe liability, payment of
additional charges if the hirer wants to terminate it
• However he need not pay this additional charges if he has already
paid more than half of the amounts due by him before termination of
agreement.
• On termination the hirer has to deliver the goods to the owner
• The owner will have the right to retain the hire (amount already
received)and to recover the arrears of hire due

23. Rights of Hire Vendor
•He has the right to charge Hire charges (or interest) on the Hire
Purchaser for the goods
•He has the right to repossess the goods on non-payment of any
installment money by the hire purchaser

24. Rights of Hire Purchaser
•The hire purchaser can return the goods if he exercises the option
and does not want to complete the transaction
•The hire vendor cannot terminate the hire purchase agreement due
to the failure on the part of the hire purchaser to pay hire or due to
an unauthorized act or breach of express conditions, without notice
to the hire purchaser to that effect. A week’s notice is necessary
where the hire is payable weekly or less than that and two
weeks notice in other cases

25. •The Hire vendor’s right of repossession will not exist in the
following cases, unless the same is sanctioned by the court
Where the hire purchase price is less than Rs 15000 and half
of the hire purchase price is paid
Where the hire purchase price is higher, three-fourths of the
same has been paid
However the right as applicable to motor vehicle is : where
the hire purchase price is less than RS 5000 and half of it has
been paid: and where the hire purchase price is more than
Rs 5000, three fourths of the same has been paid
Rights of Hire Purchaser

26. •REBATE- The hirer can claim rebate from the owner or hire
vendor in case he decided to remit the balance of the purchase price
in lumpsum without continuing the hire purchase agreement till the
last date stipulated
•However for such a change in terms of agreement he has to give 14
days notice to the owner of his intention of tendering the remaining
balance in one lot
•The rabate in such a case is calculated as follows
REBATE= 2/3 x Hire Charges x (No of installments due)
Total no of installments
Rights of Hire Purchaser

27. • Calculation of interest when Rate of interest, total cash price and Installments are
given
• Calculation of interest when rate of interest is not given
• Calculation when Installment does not include interest
• Calculation when cash price is not given
• When only each installment amount is given, but the cash price and the rate of
interest are not given
• Calculation of interest when the installments are paid half yearly
CALCULATION OF INTEREST

28. When Rate of interest, total cash price and Installments are given
• When hire purchase price is “inclusive of interest”
• When hire purchase price is “Exclusive of interest”
• Under this method, the cash price, installments and the rate of interest
are given.
• Interest is calculated on the cash price outstanding after the payment of
the installment.
• There are two alternatives available to calculate the interest included in each
installment -
• A table is prepared showing the calculations
• To present the calculations in the form of a statement.