Hire Purchase Sales promotion device that creates

customer purchasing power in the form of a fixed cost, fixed period installment loan, secured by a lien on the purchased item as the collateral. In case of capital equipment the customer repays the loan from the earnings generated by the purchased asset.

characteristicsPossessionOwnership upon the full paymentInstallment buyingSocial innovationExpands economyAdditional income

Definition According to hire purchase act of 1972.“An

agreement under which goods are let on hire under which the hirer has an option to purchase them in accordance with the terms of agreement and include an agreement under which Possession of goods is delivered by the owner

thereof to a person on the condition that such person pays the amount in periodic payments

The property of the goods will pass to such a person (Hirer) on the payment of the last installment.

Such a person has a right to terminate the agreement at any time before the property so passes.

Operation of HP transaction

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

The hirer is required to make 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 36-48months

Alternatively, instead of the down payment, the hirer as to deposit an equal amount as a fixed deposit with the finance co which provides entire finance on hire purchase terms, repayable with interest in emi over 36-48 months.

Continued…..

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

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

Advantages & disadvantages No immediate cash Easy possession Economic growth ThriftRelief to buyer

Reputed buyersMay lead to bankruptcy

Buyer has to mortgage his property

Buyer may incur lossMay loose paid

installments in the event of default

It is expensiveLoss to seller in the

event of default by the buyer.

Leasing v/s Hire purchaseOwnership of the

property lies with lessor, not transferred to lessee.

Lessor, is entitled to claim depreciation tax shield.

Capitalization of the asset is done in the books of lessor

The entire lease payments are eligible for tax computation in the books of lessee

Lessor income declines as the investment o/s in lease declines

Ownership of the property is transferred to the hirer on the payment of the last payment.

The hirer is entitled to claim depreciation tax shield.

Capitalization of asset is done in the books of hirer.

Only the hire interest is eligible for tax computation in the books of the hirer.

Finance charges are allocated to HP period equally

Leasing v/s hire purchaseThe lessor has the right

to claim the benefit of salvage value

Leasing is used as a source of finance, usually for acquiring high cost assets i.e., machinary, ships, airplanes,etc

No down payment is required for acquiring the use of leased assets.

Leased assets are disclosed by way of a note only in the books of lessee

The hirer can claim benefit of salvage value as the owner of the asset.

H.P is used as a source of finance usually for acquiring relatively low cost assets i.e., automobiles, office equip

Down payment is required to be made for acquiring the assets and a margin maintained to the extent of 20-25%

Asset bought on hire purchase will be shown as asset

Leasing v/s Hire purchaseThe lessee has to

maintain the leased asset in case of financial lease, up keep is the responsibility of lessor in case of operating lease.

Not suitable for low capital enterprises

An asset given by a leasing company is treated as fixed asset of lessor

All receipts from lessee is taken into lessor’s p&l a/c

The hirer is responsible to ensure the maintenance of asset bought.

It is highly suitable for low capital enterprises which need to show a strong asset position in their balance sheet

The hire vendor normally shows the asset let under HP either as stock in trade or receivables

Only interest portion is taken into vendor p&l a/c

Hire Purchase CostHire purchase finance provides a high

interest of income to HP company, they earn double the nominal interest rates applicable for normal lending.

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.

Eligibility to enter into HP Transactions

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 . Minor is not eligible

Foreigners and people not having permanent residence in the country are disqualified for availing such forms of credit sales.

Hire purchase & installment systemSimilarities:1. They are forms of consumer finance for the

sale of expensive and durable goods.2. They are recognized by the Indian sale of

goods act.3. Recovery of the price is through installments

spread over a fixed period of time.Suitability:1. Separate identity or individuality to facilitate

their recovery when there is a default.2. Durability to sustain the long period of

installments and facilitate re possession in the event of a default

Continued…Portability to facilitate re-possession in the

event of default.High enough value to justify a hire purchase

agreementStandard specifications to facilitate reselling,

if necessary