Hire Purchase

ASSIGNMENT TOPIC

HIRE PURCHASE

HIRE PURCHASE 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: 1. The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic installments. 2. The property in the goods is to pass to such person on the payment of the last of such installments, and 3. Such person has a right to terminate the agreement at any time before the property so passes. Many kinds of business asset are suitable for financing using hire purchase or leasing including: -

Plant

and

Agricultural

machinery,

equipment,

Business

Hotel

cars,

equipment,

Commercial Medical

vehicles,

and

dental

equipment, Computers, including software package, Office equipment.

CHARACTERISTICS

OF

HIRE PURCHASE

The following are the important characteristics of Hire Purchase : •

Possession : The possession of the goods is with the purchaser after the hire purchase agreement is entered between the lender and the purchaser.

•

Ownership upon the full payment : Even though the possession of the asset is with the purchaser, the ownership will be retained by the lender. Ownership will be transferred to the purchaser only after completing the payment agreed upon in hire purchase agreement.

•

Installment buying : Hire purchase enables customers to buy high priced assets through installments.

This enables the customers to have the

luxury of costly assets by paying a nominal interest rate in installments. •

Social Innovation : Hire purchase enables consumers to buy costly innovative assets in easy installments. This enhances the social innovations in the society.

•

Expands economy : By enabling consumers to buy more innovative products in easy installments, hire purchase enhances the sale of consumers goods thereby expanding the nations economy.

OPERATION

•

OF

HIRE PURCHASE TRANSACTION

The Finance company purchases the equipment from the supplier and gives it on hire. After the hirer and the lender enter into hire purchase agreement, the hirer gets the required asset from the supplier and gives it to the purchaser.

•

The hirer is required to pay a down payment of 20 – 25 % of the cost and pay the balance amount along with interest in advance or arrears over a time period of 36 – 48 months.

•

For the balance amount, hirer has to deposit an equal amount as a fixed deposit with the finance company which provides entire finance of hire purchase terms.

•

Deposits and the accumulated interest is returned to the hirer after fulfilling the hire purchase agreement terms.

•

The interest on each hire purchase installment is computed on the basis of flat rate of interest and is applied to the declining balance of original loan amount.

THE

HIRER'S RIGHTS

The hirer usually has the following rights: 1. To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate (each jurisdiction has a different formula for calculating the amount of this rebate)

2. To return the goods to the owner — this is subject to the payment of a penalty to reflect the owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value 3. With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating 4. 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.

THE

OWNER'S RIGHTS

The owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement. This entitles the owner: 1. to forfeit the deposit 2. to retain the installments already paid and recover the balance due 3. to repossess the goods (which may have to be by application to a Court depending on the nature of the goods and the percentage of the total price paid) 4. to claim damages for any loss suffered.

HIRE

•

PURCHASE COST

Hire purchase finance provides a high interest of income to hire purchase companies. rates

applicable

agreements,

the

for

They earn double the nominal interest normal

interest

rates

lending. charged

In

hire

are

purchase

much

higher

compared to loans provided by banks and other financial institutions. This provides huge profit to financers. •

Under the various systems of consumer credit, interest is calculated on the nominal rate that is added to the cash price of the asset purchased.

•

The amount of installment is determined by dividing the purchase price with number of months of credit provided by the financer.

•

Interest liability remains the same through out the period of credit as interest is calculated on fixed cost price of the asset. Nominal interest to be paid the lender is calculated on the cost price of the asset which he is purchasing, and is uniform throughout the period of hire purchase agreement.

ELIGIBILITY •

TO ENTER INTO

HIRE PURCHASE AGREEMENTS

People with a regular and stable income, and capacity to pay installments from the current income.

•

The person must be competent to enter into a contract. Minors are not eligible.

•

Foreigners and people not having permanent residence in the country are disqualified for availing hire purchase.

ADVANTAGES

•

OF HIRE PURCHASE

No immediate cash. There is need to pay just 20 – 25 % of the hire purchase value as initial payment. Balance amount can be paid in easy installments with a nominal interest.

•

Easy possession. The possession of the goods will be with the hirer as soon as the initial formalities are completed

•

Economic growth. Consumers can purchase costly assets very easily through hire purchase schemes. This in turn leads to growth in economy.

•

Thrift. Consumers can avail costly goods at a very nominal installment rates. This makes the consumers to spend more and purchase more costly goods.

DISADVANTAGES •

OF

HIRE PURCHASE

May lead to bankruptcy. Hirer may buy many assets and may be unable to pay his installments on time.

•

Buyer has to mortgage his property as a deposit for paying the balance amount of hire purchase.

•

Buyer may incur loss due to high rate of interest charged by the lender.

•

Buyer may loose the already paid installments if he fails to pay the remaining balance of installments.

•

If the buyer fails to pay the installments, then it is a complete loss on the part of the lender.