Hire Purchase Meaning.defination,Nature,Process
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HIRE PURCHASE...
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PRESENTATION REPORT IN THE SUBJECT (COO3A3) OF FINANCIAL SERVICES
TOPIC – HIRE PURCHASE - MEANING, NATURE, MODUS OPERANDI
ROLL NO - 106-201 CLASS - M!COM PART-II
POST GRADUATE DEPARTMENT DEPARTMENT OF COMMERCE COMMERC E ST!"AV ST!"AVIER#S COLLEGE, MAPUSA ACADEMIC $EAR 2016-201%
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MEANING AND CONCEPT OF HIRE-PURCHASE S$STEM
Hire-purchase system is a special system of purchase and sale of goods. Under this system purchaser pays the price of the goods in instalments. The instalments may be annual, six monthly, quarterly, monthly fortnightly etc. Under this system the goods are delivered to the 2
purchaser at the time of agreement before the payment of instalments but the title on the goods is transferred after the payment of all instalments as per the hire-purchase agreement. The special feature of a hire-purchase transaction is that the payment of every instalment is treated as the payment of hire charges by the purchaser to the hire vendor till the payment of the last instalment. After the payment of the last instalment, the amount of various instalments paid is appropriated towards the payment of the price of the goods sold and the ownership or the goods is transferred to the purchaser. Thus hire-purchase means a transaction where the goods are sold by vendor to the purchaser under the following conditions •
The goods will be delivered to the purchaser at the time of agreement.
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The purchaser has a right to use the goods delivered.
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The price of the goods will be paid in instalments.
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!very instalment will be treated to be the hire charges of the goods which is being used by the purchaser.
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"f all instalments are paid as per the terms of agreement, the title of the goods is transferred by vendor to the purchaser.
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"f there is a default in the payment of any of the instalments, the vendor will ta#e away the goods from the possession of the purchaser without refunding him any amount received earlier in the form of various instalments.
DEFINITION OF HIRE PURCHASE
The Hire $urchase Act %&'( defines a hire purchase agreement as, an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of agreement under which
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$ayment is to be made in instalments over a specified period of time. The possession is delivered to the purchaser at the time of entering into the contract. The property in the goods passes to the purchaser on payment of the last instalment. !ach instalment is treated as hire charges so that if default is made in payment of any one
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instalment, the seller is entitled to ta#e away the goods. The hirer is free to return the goods without being required to pay any further instalments
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falling due after the return.
NATURE OF HIRE PURCHASE 3
Under the hire purchase system, the buyer agrees to pay for the commodity in installments. )n signing the agreement, the buyer can ta#e possession of the commodity and use it. *ut the ownership in the articles rests with the seller until the buyer pays the final installment. "f the buyer fails to pay any installment, the seller is entitled to ta#e bac# the article and the buyer will have no claim over the installments he has already paid. The amount paid will be treated as hire charges for the article. Hence the sale becomes complete only when the buyer pays the final installment. )n payment of the final installment, the ownership of the article passes from the seller to the buyer. Till then the agreement is one for hiring. +ection % provides that this Act applies to those hire purchase agreements under which the hire purchase price does not exceed the sum of !ighty thousand shillings other than a hire purchase agreement in which the hirer is a body corporate. This monetary limitation does not apply so as to affect the definition of /hire purchase business/ 0redit +ale is different from hire purchase agreement. 0redit sale arises when there is an agreement for the sale of goods on credit basis. "n this case also, the purchase price may be paid in future sometimes in four or five installments. "n the case of credit sale goods become the property of the buyer with the payment of the first installment. "n case of failure to #eep up with installments, the seller cannot repossess product but may sue the buyer in 0ourt for unpaid amount. +ellers may at time request for post-dated cheques. This system is also #nown as deferred payment system. A hire-purchase agreement to buy, but only an option is given to the hirer to buy, while under credit sale there is an agreement to buy and no option to return the goods. FEATURES OF HIRE PURCHASE
%. Under hire purchase system, the buyer ta#es possession of goods immediately and agrees to the total hire purchase price in instalments. (. !ach instalment is treated as hire charges. . The ownership of the goods passes from buyer to seller on the payment of the instalment. 1. "n case the buyer ma#es any default in the payment of any instalment, the seller has right to repossess the goods from the buyer and forfeit the amount already received treating it as hire charge. 2. The hirer has the right to terminate the agreement any time before the property passes. That is, he has the option to return the goods in which case he need not pay instalments
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falling due thereafter. However, he cannot recover the sums already paid as such sums legally represent hire charge on the goods in question.
MODUS OPERANDI OF HIRE PURCHASE (PROCESS)
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The finance hire purchase company purchases the equipment from the supplier and
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gives it on hire. The hirer is required to ma#e a down payment of (3-(24 of the cost and pay the balance amount along with the interest in !5", in advance or arrears over a time span of 6-17
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months Alternately, instead of the down payment, the hirer has to deposit an equal amount as a fixed deposit with the finance company which provides the entire finance on hire
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purchase terms, repayable with interest in !5"s over 6-17 months. 8eposit and the accumulated interest is returned to the hirer upon payment of the last instalment. The interest on each hire purchase installment is computed on the basis of flat rate of interest and the effective rate of interest is applied to the declining balance of the original loan amount to determine the interest component of installment. 9or a given flat rate of interest, the equivalent effective rate of interest is higher
HIRE PURCHASE< PROCEDURE FOR HIRE PURCHASE (=ITH DIAGRAM)
Hire purchase involves a certain procedure, that is to say, modus operandi to be followed. 9or this, an agreement called hire purchase agreement is made in written between the parties involved in the hire purchase transaction. The agreement contains the following The hire purchase price of the goods to which the agreement relates: The cash price of the goods, that is to say, the price at which the good is purchased for cash: The date of the commencement of the agreement: The number and time interval of installments by which the hire purchase price is to be paid: The name of goods, with its sufficient identity, to which the hire purchase agreement relates to: The amount to be paid, if any, at the time of signing the agreement: The signatures of the parties involved in transaction. 5
"f the hire purchase transaction is financed by the manufacturer or dealer, then two parties, called, hire vendor and hire purchaser, are involved in the agreement. And if the hire purchase transaction is financed by some financial institution, then there are three parties involved in the transaction. These are i ii iii
Hire ;endor, Hire $urchaser, and 9inancial "nstitution.
"n such case, the vendor, firstly, receives the bills of exchange for hire purchase price of the goods from the hirer. The vendor, then, discounts the bills with the financial institution and, thus, gets payment for the goods sold under hire purchase system. The financial institution collects the payments of the bills from the hirer, as and when the instalments fall due. This entire process is depicted in the following 9igure
Hire-purchase transaction benefits all parties involved in it. s hirer usually the the obligations installments deposit has the following already paid obligations and recover the balance due non-standard compensate to repossess claim damages way, the goods he for or for any which she any loss must loss suffered may continue in have asset to value to be pay by the application installments togoods atime and, 0ourt if depending appropriate, on Hire-purchase is abreaches credit purchase. any The other owner>s price goods third under rights are party. hire-purchase delivered in system the is possession paid in installments. of the purchaser at the time • the The Hire installments owner hire-purchase vendor usually continues or has has the ato right right be any the to to of owner use terminate terminate the other of the the terms the goods agreement as agreement ain bailer. the till the agreement. at where payment any the This of hirer in last the entitles defaults installment. capacity the in owner of paying • The becomes after the payment of all installments "f there is athe default in the payment of any installment, the hire vendor will ta#e away the •
hirer>s obligations The non-standard hirer usually way, has he the or she following must continue obligations to pay the installments and, iflast appropriate, compensate the owner for any loss in asset value any other third party. installments owner>s owner usually rights or has the right any to of terminate other terms the agreement the agreement. where the This hirer entitles defaults the in owner paying the nature of the goods and the percentage of the total price paid 0haracteristics characteristics of Hire-$urchase of hire-purchase +ystem system are as under commencement pay ta#e the reasonable hire of installments the care agreement. of the goods if the hirer damages the by using in aaof hirer. To A hirer inform can sell the products where the if an goods only will ifgoods he be has #ept. purchased finally orthem else not to • forfeit retain the the installments deposit already paid and recover the balance due repossess the goods which may have to be by application togoods atime 0ourt depending on to Hire-purchase claim damages is abreaches for credit any purchase. loss suffered The price goods under are hire-purchase delivered in system the is possession paid in installments. of the purchaser at the time Hire vendor continues be the owner of the goods till the payment of installment. The hire-purchase has becomes ato right to owne use terminate the the agreement as ain bailer. at any in the capacity of • BIBLOGRAPH$
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