Hire purchase agreement - Unitedworld School of Business

2. Hire purchase is a mode of financing the price of the goods to
be sold on a future date. In a hire purchase transaction, the
goods are let on hire, the purchase price is to be paid in
instalments and hirer is allowed an option to purchase the
goods by paying all the instalments. Hire purchase is a method
of selling goods. In a hire purchase transaction the goods are let-out
on hire by a finance company (creditor) to the hire purchase customer
(hirer). The buyer is required to pay an agreed amount in periodical
instalments during a given period. The ownership of the property
remains with creditor and passes on to hirer on the payment of the
last instalment.
Concept of Hire purchase

3. Hire Purchase Agreement
A hire purchase agreement is defined in the Hire Purchase Act,
1972 as peculiar kind of transaction in which the goods are let
on hire with an option to the hirer to purchase them, with the
following stipulations:
a. Payments to be made in installments over a specified
period.
b. The possession is delivered to the hirer at the time of
entering into the contract.
c. The property in goods passes to the hirer on payment of
the last installment.
d. 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
e. The hirer/ purchase is free to return the goods without
being required to pay any further installments falling due
after the return.

4. Supreme court has laid down that the sum and substance of hire
purchase is two fold. One, the owner under the agreement
enters into a transaction of hiring out the goods on the terms
and conditions mentioned in the agreement. second, the
option to purchase exercisable by the hirer on payment of all
the installments of hire, arises when the installments are paid
and not until then. There is no agreement to buy goods, the
hirer being under no obligation to buy but has an option to
return the goods or to become its owner by payment in full of
the hire agreed installments and the price for exercising the
option.

5. Illustration:
A sells a refrigerator to B with a stipulation that B shall pay A fixed sum every
month by way of installments till the full price of the refrigerator is paid.
Now till B pays the full amount to A by way of installments, he does not
become the owner of the refrigerator . He can discontinue payment of
further installments. In such case, A takes back the refrigerator has no
right to recover installments already paid by him to A because the amount
paid by him is adjusted towards the hire charges of refrigerator. This is
called a hire purchase agreement.

6. Difference Between Sale and Hire Purchase
Although hire purchase system could ultimately result in sale of goods, the sale in normal sense
and sale under hire purchase system are not the same. The following are the differences between
sale and hire purchase.
Sale
• A ‘sale’ is governed by the sale of Goods Act,
1930.
• In case of sale, the ownership of the goods is
transferred to the buyer immediately.
• In case of sale, the buyer makes payment in
lump sum.
• The buyer pays only for the price of goods.
• On non-payment of the consideration the
seller cannot take back the goods, but can
only take legal action on buyer.
• Once a sale has taken place, neither the seller,
nor the buyer can terminate the contract
(unless it is for genuine reason like damage of
goods etc.)
• When the buyer becomes insolvent, the seller
has to undertake the risk of loss.
• A sale is subject to levy of sales tax at the
time of contract of sale.
Hire Purchase
• Hire purchase is governed by the Hire
Purchase Act, 1972.
• In case of Hire purchase, the ownership of
goods is transferred to buyer on payment of
all installments.
• In case of hire purchase, the payment is made
in installments.
• The hire purchaser pays for the price of goods
and also some amount of interest.
• On non-payment of any installment, the seller
can re-possess the goods.
• Either the buyer or the seller can terminate
the contract at any point of time, until the
payments of last installment.
• When the hire purchaser becomes insolvent,
the seller can reposes the goods, and hence
need not undertake the risk of loss.
• In this case, the sales tax will be leviable at
the time of ownership (i.e. on payment of last
installment).

7. Illustration:
A purchases a machine for down payment of Rs. 20000 and
3 annual instalments of 20000each. Cash price is 74500. show
theaccounting ? Rate of interest 5%
74500 – 20000 = 54500interest = 2725amount due : 57225
2nd instalement 20000amount due : 37225interest = 1861 due =
39086
3rd instalment : 20000, balance : 19086 interest (balancing amt) :
914last instalment 20000 balance = nil

8. Legal Framework
There is no exclusive legislation dealing with hire purchase transaction in
India. The Hire purchase Act was passed in 1972. An Amendment bill was
introduced in 1989 to amend some of the provisions of the act. However,
the act has been enforced so far. The provisions of are not inconsistent
with the general law and can be followed as a guideline particularly where
no provisions exist in the general laws which, in the absence of any
specific law, govern the hire purchase transactions. The act contains
provisions for regulating:
1. the format / contents of the hire-purchase agreement
2. warrants and the conditions underlying the hire-purchase
agreement,
3. ceiling on hire-purchase charges,
4. rights and obligations of the hirer and the owner.
In absence of any specific law, the hire purchase transactions are
governed by the provisions of the Indian Contract Act and the
Sale of Goods Act

9. Terms used in Hire Purchase Agreements
• Hire purchaser: A hire purchaser is a person who possesses the
goods under hire purchase agreement for use within an option to
either purchase it or return after use.
• Hire vendor: a hire vendor is a person who sells the goods under
hire purchase agreement.
• Cash price: it is the price of goods which is sold under ‘contract of
sale’
• Hire purchase price: it is the price at which the goods are sold
under ‘hire purchase system’ it includes cash price of the goods and
interest.
• Installment money: it is the part of the hire purchase price paid by
hire purchaser, in periodic intervals.
Down payment: it is the initial payment made by the hire puchaser
to the hire vendor at the time of entering into hire purchase
agreement.

10. • Hire charges: it is an amount refers to the difference between
hire purchase price and cash price (H P- C P= H C) it also
referred to as interest.
• Statutory hire charges: it is a hire charges according to the
hire purchase act of, 1972.
• Hire purchase agreement: it is an agreement between hire
purchaser and hire vendor according to section 2(c) of the
hire purchase act 1972, for purchasing of goods according to
agreement.
• Termination of hire purchase agreement: The hirer can
terminate the agreement at any time by giving the 14 days
notice to the owner. However what ever the amount is
already paid by the hirer is considered as a hire charges.

11. Procedure 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.
• 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.
• Down payment by customer on completion of proposal form.
• 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

12. CASE
In Auto supply company vs Raghunatha chetty
a company had agreed to offer a bus on a hire purchase agreement
on condition that rs 1140/ were to be paid by the hirer on delivery
and 11 monthly installments were to be paid thereafter, each of rs.
226 and the owners were to be entitled to terminate the contract
on default occurring if hirer for any month was in arrears. A suit
was brought by the owners for possession of the bus on the
happening of the said condition. Lord coutts-trotter,c.j. held that
though there was no such explicit condition, yet it was the
necessary implication that when the agreement terminated either
by choice or default of the hirer ,all sums paid by him are to be
retained by the owners, the amount Rs.1140/- being construed
either as the installment of the hire money or as the premium
taken by the owner for granting lease and in either case money
received was not to be refunded. The money was not to be
regarded as advance of rent.

13. Hire purchase vs leasing
Hire purchase
• The hirer has the option
to purchase the goods
• Is a method of financing business
assets & consumer articles
• Depreciation & investment
allowance can be claimed
• Only the interest is tax component
deductible
• Hirer enjoys the salvage value
of the asset
Leasing
• In leasing the lessee has no option
to buy the goods
• Is a method of financing business
assets only
• Depreciation & investment
allowance cannot be claimed
• Entire lease rental is tax deductible
• Lessee does not enjoy the salvage
value of the asset

14. Concept Of Lease Financing
Lease financing denotes procurement of assets through lease. The subject of
leasing falls in the category of finance. Leasing has grown as a big industry in the
USA and UK and spread to other countries during the present century. In India,
the concept was pioneered in 1973 when the First Leasing Company was set up in
Madras and the eighties have seen a rapid growth of this business. Lease as a
concept involves a contract whereby the ownership, financing and risk taking of
any equipment or asset are separated and shared by two or more parties. Thus, the
lessor may finance and lessee may accept the risk through the use of it while a
third party may own it. Alternatively the lessor may finance and own it while the
lessee enjoys the use of it and bears the risk. There are various combinations in
which the above characteristics are shared by the lessor and lessee.

15. Meaning Of leasing
A lease transaction is a commercial arrangement whereby an equipment owner or
Manufacturer conveys to the equipment user the right to use the equipment in return
for a rental. In other words, lease is a contract between the owner of an asset (the
Lessor) and its user (the lessee) for the right to use the asset during a specified period
in return for a mutually agreed periodic payment (the lease rentals). The important
feature of a lease contract is separation of the ownership of the asset from its usage.
Lease financing is based on the observation made by Donald B. Grant:
“Why own a cow when the milk is so cheap? All you really need is milk and not the
cow.”

16. Leasing In India
Leasing has grown by leaps and bounds in the eighties but it is estimated that hardly
1% of the industrial investment in India is covered by the lease finance, as against
40% in USA and 30% in UK and 10% in Japan. The prospects of leasing in India are
good due to growing investment needs and scarcity of funds with public financial
institutions. This type of lease finances is particularly suitable in India where a large
number of small companies have emerged more recently. Leasing in the sphere of
land and building has been in existence in India for a long time, while equipment
leasing has become very common in the recent times.

17. Types of lease agreement
Lease agreements are basically of two types. They are
(a) Financial lease and (b) Operating lease.
The other variations in lease agreements are (c) Sale
and lease back (d) Leveraged leasing and (e) Direct
leasing.

18. Financial lease
Long-term, non-cancellable lease contracts are known as financial leases. The
essential point of financial lease agreement is that it contains a condition whereby
the lessor agrees to transfer the title for the asset at the end of the lease period at
a nominal cost. At lease it must give an option to the lessee to purchase the asset
he has used at the expiry of the lease.
Operating lease
An operating lease stands in contrast to the financial lease in almost all aspects. This
lease agreement gives to the lessee only a limited right to use the asset. The lessor
is responsible for the upkeep and maintenance of the asset. The lessee is not given
any uplift to purchase the asset at the end of the lease period. Normally the lease
is for a short period and even otherwise is revocable at a short notice. Mines,
Computers hardware, trucks and automobiles are found suitable for operating
lease because the rate of obsolescence is very high in this kind of assets.

19. Sale and lease back
It is a sub-part of finance lease. Under this, the owner of an asset sells the
asset to a party (the buyer), who in turn leases back the same asset to the
owner in consideration of lease rentals. However, under this arrangement,
the assets are not physically exchanged but it all happens in records only.
Leveraged leasing
Under leveraged leasing arrangement, a third party is involved beside
lessor and lessee. The lessor borrows a part of the purchase cost (say 80%)
of the asset from the third party i.e., lender and the asset so purchased is
held as security against the loan.

20. Direct leasing
Under direct leasing, a firm acquires the right to use an asset from
the manufacturer directly. The ownership of the asset leased out
remains with the manufacturer itself. The major types of direct lessor
include manufacturers, finance companies, independent lease
companies, special purpose leasing companies etc

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