2. Contents
• Hire Purchase & Consumer : Overview, Legal & Tax
Aspects,
• Financial Evaluation Of Hire Purchase
• Accounting For Hire Purchase, Consumer Credit.
3. Hire Purchase & Consumer : Overview,
Legal & Tax Aspects,
• Hire purchase is a type of installment credit under which the hire purchaser, called
the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the
repayment of principal as well as interest, with an option to purchase. Under this
transaction, the hire purchaser acquires the property (goods) immediately on signing
the hire purchase agreement but the ownership or title of the same is transferred only
when the last installment is paid.
• The hire purchase system is regulated by the Hire Purchase Act 1972. This Act defines
a hire purchase as
• “An agreement under which goods are let on hire and under which the hirer has an
option to purchase them in accordance with the terms of the agreement and includes
an agreement under which:
• The owner delivers possession of goods thereof to a person on condition that such
person pays the agreed amount in periodic installments.
• The property in the goods is to pass to such person on the payment of the last of such
installments, and
• Such person has a right to terminate the agreement at any time before the property
so passes”.
4. • Hirer(purchase goods) company
• But (money right now)
• But (make payments in installment)
• Agreement (hire purchase agreement)
• Goods (installment) they receive
• Ownership once they paid last installment
• Possession transfer.
• Legal transfer.
5. • Legal framework of Hire purchase transactions
• The hire purchase system is regulated by the Hire Purchase Act
1972. In a hire-purchase transaction, assets are let on hire, the price
is to be paid in installments and hirer is allowed an option to
purchase the goods by paying all the installments. A
• Hire Purchase agreement usually requires the customer to pay an
initial deposit, with the remainder of the balance, plus interest, paid
over an agreed period of time. Under hire purchase agreement, you:
• Purchase goods through installment payments
• Use the goods while paying for them
• Do not own the goods until you have paid the final installment
6. • Rights of the hirer
• The hirer usually has the following rights:
• To buy the goods at any time by giving notice to the
owner and paying the balance of the HP price less a
rebate
• To return the goods to the owner — this is subject to the
payment of a penalty.
• with the consent of the owner, to assign both the benefit
and the burden of the contract to a third person.
• Where the owner wrongfully repossesses the goods,
either to recover the goods plus damages for loss of quiet
possession or to damages representing the value of the
goods lost.
7. Rights of hirer
• Owner of goods
• Hirer of goods
• Hire(installments)
1)Purchase by full payment taking rebate (discount)
2) Return goods to owner
• Loss to the owner
• Hirer needs to pay penalty to the owner.
• 3)consent from owner third party (cost and burden
,benefit)
• 4) loss of goods
• Recover such losss.
8. Financial Evaluation of Hire Purchase
• Financial Evaluation:
• It is an evaluation by the hirer of the desirability for lease and hire
purchase. The hirer makes decision based on the Present Value of Net Cash
Outflow.
• The decision is considered favorable when the PV of Net Cash Outflow
under Hire Purchase is less than the PV of Net cash Outflow under leasing.
Following are the steps involved.
• Step 1 Calculate annual interest amount
• Step 2 Find the principal amount outstanding at the beginning of the each
year = Total outstanding principal –principal paid in the previous year.
• Step 3 Find principal paid in the previous year = Annual installment
amount –Annual Interest
9. • Step 4 Find Annual ITS = Annual Interest x Tax rate
• Step 5 Find Annual Depreciation
• Step 6 Find Annual DTS = Annual depreciation x Tax rate
• Step 7 Find Total TS = Step 4 + Step 6
• Step 8 Find Annual installment amount = Total HP amount + (HP
amount x flat rate of interest) / No. of HP years
• Step 9 Find PV of salvage value of assets = SV x PVF
• Step 10 Find Net Cash Outflow of HP = Step 8 –Step 7
10. Accounting for Hire Purchase
• The simplest way to account for a hire purchase agreement is to
think about what has actually happened, and account for the various
individual elements in the normal way.
• 1. You have bought an item (normally of plant & machinery),
perhaps from a machinery dealership. You will want to process a
transaction for the purchase of the item, and account for the VAT in
the normal way.
• 2. You have bought the services of a finance company, who may
charge you interest and will probably charge you fees
(documentation fee, option to purchase fee, etc). You will process a
transaction for the charge of these fees, and whilst you account for
VAT in the normal way remember that finance costs are normally
exempt from VAT.
• 3. You have taken out a loan from the finance company. The cost of
the item purchased from the dealer, and the fees, interest etc from
the finance company, are both paid by this loan.
• 4. The repayments you make to the finance company, both any
initial one-off sums and the regular payments, will be repayments to
this loan
11. Consumer Credit
• Consumer credit is personal debt taken on to purchase
goods and services. A credit card is one form of
consumer credit.
• Although any type of personal loan could be labeled
consumer credit, the term is more often used to describe
unsecured debt that is taken on to buy everyday goods
and services.
• However, consumer debt can also include collateralized
consumer loans like mortgage and car loans.
12. • Installment credit is used for a specific purpose and is
issued for a set period of time.
• Revolving credit is an open-ended loan that may be used
for any purchase.
• The disadvantage of revolving credit is the cost to those
who fail to pay off their entire balances every month and
continue to accrue additional interest charges.