Hire Purchase

HIRE-PURCHASE - 2 Modus Operandi

The modus operandi of a hire purchase transaction is as follows: 

The finance (hire purchase) company purchases the equipment from the supplier  and gives it on hire.

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

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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 purchase terms, repayable with interest in EMIs over 36-48 months.

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Deposit and the accumulated interest is returned to the hirer upon payment of the last installment.

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The interest on each hire h ire purchase installment is computed on the ba sis 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. For a given flat rate of interest, the equivalent effective rate of interest is higher.

Hire Purchase Vs Installment Payment System Hire Purchase

Sale The hirer has the option to purchase the goods anytime during the term of the agreement. He also has the right to terminate the agreement at anytime  before payment of the last installment. Ownership Ownership is passed to the hirer only if he exercises the option to   purchase.

Installment Payment System

Sale The sale has already taken place, the goods have already been delivered to to the owner and the buyer is bound to pay the full price.

Ownership Ownership is transferred to the purchaser on payment of the first installment.

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Hire Purchase Vs Lease Financing Hire Purchase

Lease Financing

Ownership The ownership of the equipment   passes to the hirer on payment of the last installment.

Ownership The lessor company is the owner  and the lessee is entitled only to the use of the leased equipment.

Depreciation The hirer is entitled to the depreciation shield on the assets hired by him.

Depreciation Depreciation on the asset is charged in the books of the lessor.

Tax Benefits Hirer is allowed the depreciation claim and finance charge and the seller may claim any interest on borrowed funds to acquire the asset for tax purposes.

Tax Benefits The lessor is allowed to claim depreciation and lessee is allowed to claim rentals and maintenance cost Against taxable income.

Maintenance Cost of maintaining the hired equipment is to be borne by the hirer itself.

Maintenance Maintenance of the leased asset is the responsibility of the lesse.

Extent 20-25% of the cost of the equipment is required to be paid by the hirer as down  payment.

Extent No down payment is required from the lessee.

Magnitude The magnitude of funds involved is relatively low.

Magnitude The magnitude of funds involved is very large.

Subjects of hire purchase Automobiles, generators, office equipment etc. are usually hire purchased.

Subject of Lease Financing Aircrafts, ships, machinery are taken on financial lease.