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:
• A. Payment to be made in instalment over a
specified period.

3. • B. The possession is delivered to the hirer at the
time of entering into the contract;
• C. The property in the goods passes to the hirer
on payment of the last instalment;
• D. Each instalment is treated as hire charges so
that if default is made in payment of any
instalment, the seller becomes entitled to take
away the goods; and
• E. The hirer is free to return the goods without
being required to pay any further instalments
falling due after the return.

4. Aspects of hire purchase agreement
• A hire-purchase agreement has two aspects:
• Firstly, an aspect of bailment of goods subject
to hire-purchase agreement, and 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.

5. Instalment Sale & its Payment
• In an Instalment 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
instalments over a definite period.
• In instalment sale the ownership in the goods
passed on to the purchaser simultaneously
with the payment of the initial/first
instalment.

6. 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 instalment. However,
before the payment of the last instalment, the
ownership of the asset vests in the finance
company/intermediary (seller).
• Hirer is entitled to take the availing of benefit
of depreciation.

7. Size of cost of acquisition, and margin
money
• Usually the cost of acquisition under hirepurchase 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 instalment.

8. 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.

9. 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.

10. 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.

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

12. 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.

13. • 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.

14. • 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.

15. • Schedule of hire charges.
• Indemnity clause and Stamp Duty