HIRE PURCHASE IN INDIA

SUBMITTED BY:SHREYA GUPTA

PRAJAKTA PRIYANKA

KUNAL SIFA

SONALI SAGAR

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Acknowledgement

We are very grateful to our institution for encouraging us and making us understand the value of making project file on different subject. We get wide information about the subject and especially about the respective topic that has been selected. Our special thanks to Prof. for his kind cooperation and proper guidance and valuable contribution. Further we also thanks to our principal & coordinator for supporting us to carry out this activity with great interest. Thus I appreciate the cumulative affords of all mentioned above and also my friends in preparing this project file and contributing their valuable time to make it a successful one.

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VIDYA PRASARAK MANDAL’S

K.G. JOSHI COLLEGE OF ARTS & N.G. BEDEKAR COLLEGE OF COMMERCE

THANENAAC ACCREDITED (A)

CertificateThis is to certify thatS.no

Name R.No.

1. Shreya gupta2. Prajakta3. Priyanka4. Kunal5. Sifa6. Sonali7. Sagar

of the SYBMS.-‘A’ class has satisfactorily carried out the required project work in Management Accounting and this project file represents their bonafied work during the year 2011-2012.

Date________

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Professor in-charge

INDEX

SR.NO. TOPIC Pg.No.

1. Meaning and concept of hire purchase

2. Two options of hire purchase

3. Importance of hire purchase

4. Needs of hire purchase

5. List of companies providing the facility of hire purchase

6. Features of hire purchase system

7. Difference between hire purchase system and installment system

8. Standard provision for hire purchase

9. Advantages of hire purchase

10. Disadvantages of hire purchase

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11. Benefits to companies

12. Benefits to consumer

MEANING AND CONCEPT OF HIRE PURCHASE :

Hire purchase (abbreviated HP) is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now be found in China, Japan, Malaysia, India, Australia, Jamaica and New Zealand. It is also called closed-end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. In Canada and the United States, a hire purchase is termed an installment plan; other analogous practices are described as closed-end leasing or rent to own.

If the buyer defaults in paying the installments, the owner may repossess the goods, a vendor protection not available with unsecured-consumer-credit systems. HP is frequently advantageous to consumers because it spreads the cost of expensive items over an extended time period. Business consumers may find the different balance sheet and taxation treatment of hire-purchased goods beneficial to their taxable income

Hire-puchase 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 purchaser at the time of agreement before the payment of instalments

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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.

the purchaser has a right to use the goods delivered. the price of the goods will be paid in instalments. every instalment will be treated to be the hire charges of the

goods which is being used by the purchaser. if all instalments are paid as per the terms of agreement , the title

of the goods is transferred by vendor to the purchaser. if there is a default in the payment of any of the instalments, the

vendor will take away the goods from the possession of the purchaser without refunding him any amount received earlier in the form of various instalments.

HIRE PURCHASE OFFERS   TWO OPTIONS:

Hire Purchase Fixed RateThis allows you to purchase a bus or coach with regular payments that remain constant throughout the contract term.  Hire purchase fixed rate is ideal if you need to stick to an exact budget when interest rates vary - you'll always know how much you need to pay.  Your payments can be timed to fit with the cash flow of your business, and after the final installment, provided you meet

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the terms and conditions of your agreement, you become the owner.

Hire Purchase with Balloon This is a safe, low-risk option as you make lower monthly payments on a bus or coach plus a final balloon payment. Hire purchase with balloon is flexible too.  At the end of the agreement, provided you've met the terms and conditions of your agreement, you can either make a final lump sum (balloon) payment and keep the bus or coach or re-finance the balloon and continue making your payments.

IMPORTANCE OF HIGHER PURCHASETo be valid, HP agreements must be in writing and signed by both parties. They must clearly set out the following information in a print that all can read without effort:

1. a clear description of the goods2. the cash price for the goods3. the HP price, i.e., the total sum that must be paid to hire and then

purchase the goods4. the deposit5. the monthly installments (most states require that the applicable

interest rate is disclosed and regulate the rates and charges that can be applied in HP transactions) and

6. a reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period).

7. The right of the hirer to terminate the contract when he feels like doing so with a valid reason.

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NEEDS OF HIGHER PURCHASE

Essentially, asset-based financing in India particularly by non-banking financial companies is split in two documentation modes - lease and hire-purchase. These two are technically different instruments, but in essence, there is not much that differs between the two, except for the caption. In spite of the substantive similarity, historically, there has been a diametric separation between these two forms. The assets usually subject matter of hire-purchase have been different from those generally leased out. Leasing has been used mostly for plant and machinery, while hire-purchase has commonly been used for vehicles. Even the players have been different.

The reasons for this diametric distinction are more historical than logical. Hire-purchase, essentially a British form, entered India during the Colonial era, and thrived as almost the only form of external finance available for commercial vehicles. For the financiers, as witnessed World-over, commercial vehicles was the natural choice for several asset-features he loves: lasting value, ready secondary market, self-paying feature, etc. Hence, the industry of hire-purchase became synonymous with truck-financing. Besides, the motor vehicles laws gave the surest legal protection any law could give to a financier: the financier would not have to carry any of the operational risks of a motor vehicle, and yet, any transfer of the vehicle would not be possible without the financier's assent.

Leasing, essentially a US-innovation, entered the country significantly in the early 80s, and was propagated as an alternative to traditional modes of industrial finance. Besides, the early motivation (which continues with a number of players even now) of leasing was capital allowances, more significantly the investment allowance, which was not available

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for transport vehicles. Hence, the leasing form historically clung to industrial plant and machinery.

For several years, there was no lease of vehicles, because the Motor Vehicles law protection was not applicable to a lease, and there was no investment allowance on vehicles, and for reciprocal reasons, there was no hire-purchase of industrial machinery.

These reasons have vanished over time.

The Motor Vehicles law now treats leases and hire-purchase at par from the viewpoint of financier-protection.

Investment allowance has been abolished, and hence, there are no predominant tax-preferences to a lease.

The RBI treats lease and hire-purchase at par and has stopped giving a distinctive classification to leasing and hire-purchase companies.

The accounting norms lead to the same effect on pre-tax income, as also balance sheet values, be it a lease or hire-purchase transactions. Therefore, income-tax and sales-tax treatment apart, there is not much that is different between lease and hire-purchase. The choice between the two is by and large open, subject to tax consequences.

LIST OF HIGHER PURCHASE TOP COMPANIES IN INDIA

Hire Purchase And Lease Association Kothari Safe Deposits Limited Nicco Uco Financial Services Ltd Leasing Finance India Ltd. I.T.C. Limited Athreya Consultancy Services

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Softpal Consultants

Ottapalam Co-operative Urban Bank Ltd.

FEATURES OF HIRE- PURCHASE SYSTEM

Before discussing the characteristics of hire-purchase system, we must know what is a hire purchase agreement and what are the contents of a hire-purchase agreement. Hire-purchase agreement means a contract between the hire vendor and the hire purchaser regarding the sale of goods under certain conditions. Usually every hire-purchase agreement shall contain the following terms:

the cash price of the goods, cash price means the price at which goods may be purchased against cash payment.

the hire-purchase price, hire purchase price means the total amount which is payable by the hire-purchaser under the agreement.

the date on which the hire-purchase agreement will commence. the description of the goods that will be delivered to the hire-

purchaser at the commencement of the agreement. the number of instalments to be paid by the hire-purchaser along

with the amount of each instalment and the date of payment of each instalment.

the down payment if any, the down payment means the amount which is required to be paid by hire-purchaser to the hire vendor at the time of commencement of hire-purchase agreement.

the rate interest charged by the hire vendor (optional).

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Characteristics of Hire-Purchase System

The characteristics of hire-purchase system are as under

Hire-purchase is a credit purchase. The price under hire-purchase system is paid in instalments. The goods are delivered in the possession of the purchaser at the

time of commencement of the agreement. Hire vendor continues to be the owner of the goods till the

payment of last instalment. The hire-purchaser has a right to use the goods as a bailer. The hire-purchaser has a right to terminate the agreement at any

time in the capacity of a hirer. The hire-purchaser becomes the owner of the goods after the

payment of all instalments as per the agreement. If there is a default in the payment of any instalment, the hire

vendor will take away the goods from the possession of the purchaser without refunding him any amount.

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DIFFERENCE BETWEEN HIRE – PURCHASE SYSTEM AND INSTALLMENT PAYMENT SYSTEM

Instalment Payment System is system of purchase and sale of goods in which title of goods is immediately transferred to the purchaser at the time of sale of goods and the sale price of the goods is paid in instalments. In the event of default in payment of any instalment, the seller has no right to take back goods from the possession of the purchaser. He can file a suit for the recovery of the outstanding balance of the price of goods sold. The followings are the differences between Hire-purchase system and Instalment payment system:

In Hire-purchase system, the transfer of ownership takes place after the payment of all instalments while in case of Instalment payment system, the ownership is transferred immediately at the time of agreement.

In Hire-purchase system, the hire-purchase agreement is like a contract of hire though later on it may become a purchase after the payment of last instalment while in Instalment payment system, the agreement is like a contract of credit purchase.

In case of default in payment , in Hire-purchase system the vendor has a right to back goods from the possession of the hire-purchaser while in case of Instalment payment system, the vendor has no right to take back the goods from the possession of the purchaser; he can simply sue for the balance due.

In Hire-purchase system, if the purchaser sells the goods to a third party before the payment of last instalment, the third party does not get a better title on the goods purchased. But in case of Instalment payment system, the third party gets a better title on the goods purchased.

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In Hire-purchase system the provisions of the Hire-purchase Act apply to the transaction while in case of Instalment payment system, the provisions of Sale of Goods Act apply to the transaction.

STANDARD PROVISIONS FOR HIRE PURCHASE OR TERMS AND CONDITIONS FOR HIRE

PURCHASE

To be valid, HP agreements must be in writing and signed by both parties. They must clearly set out the following information in a print that all can read without effort:

1. a clear description of the goods2. the cash price for the goods3. the HP price, i.e., the total sum that must be paid to hire and then

purchase the goods4. the deposit5. the monthly installments (most states require that the applicable

interest rate is disclosed and regulate the rates and charges that can be applied in HP transactions) and

6. a reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period).

7. The right of the hirer to terminate the contract when he feels like doing so with a valid reason.

The hirer's rights

The hirer usually has the following rights:

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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.

Basically hirer have following rights- 1. Rights of protection 2. Rights of notice 3. Rights of repossession 4. Rights of Statement 5. Rights of excess amount

The hirer's obligations

The hirer usually has the following obligations:

1. to pay the hire installments2. to take reasonable care of the goods (if the hirer damages the

goods by using them in a non-standard way, he or she must continue to pay the installments and, if appropriate, compensate the owner for any loss in asset value)

3. to inform the owner where the goods will be kept.

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4. A hirer can sell the products if an only if he has purchased the goods finally or else not to any other third party.

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 deposit2. to retain the installments already paid and recover the balance

due3. 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.

ADVANTAGES OF USING HP AS A SOURCE OF FINANCE

Introduction

As we discussed in our introduction to asset finance, the use of hire purchase or leasing is a popular method of funding the acquisition of capital assets. However, these methods are not necessarily suitable for

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every business or for every asset purchase. There are a number of considerations to be made, as described below:

Certainty

One important advantage is that a hire purchase or leasing agreement is a medium term funding facility, which cannot be withdrawn, provided the business makes the payments as they fall due.

The uncertainty that may be associated with alternative funding facilities such as overdrafts, which are repayable on demand, is removed.

However, it should be borne in mind that both hire purchase and leasing agreements are long term commitments. It may not be possible, or could prove costly, to terminate them early.

Budgeting

The regular nature of the hire purchase or lease payments (which are also usually of fixed amounts as well) helps a business to forecast cash flow. The business is able to compare the payments with the expected revenue and profits generated by the use of the asset.

Fixed Rate Finance

In most cases the payments are fixed throughout the hire purchase or lease agreement, so a business will know at the beginning of the agreement what their repayments will be. This can be beneficial in times of low, stable or rising interest rates but may appear expensive if interest rates are falling.

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On some agreements, such as those for a longer term, the finance company may offer the option of variable rate agreements. In such cases, rentals or installments will vary with current interest rates; hence it may be more difficult to budget for the level of payment.

The Effect Of Security

Under both hire purchase and leasing, the finance company retains legal ownership of the equipment, at least until the end of the agreement. This normally gives the finance company better security than lenders of other types of loan or overdraft facilities. The finance company may therefore be able to offer better terms.

The decision to provide finance to a small or medium sized business depends on that business' credit standing and potential. Because the finance company has security in the equipment, it could tip the balance in favour of a positive credit decision.

Maximum Finance

Hire purchase and leasing could provide finance for the entire cost of the equipment. There may however, be a need to put down a deposit for hire purchase or to make one or more payments in advance under a lease. It may be possible for the business to 'trade-in' other assets which they own, as a means of raising the deposit.

Tax Advantages

Hire purchase and leasing give the business the choice of how to take advantage of capital allowances.

If the business is profitable, it can claim its own capital allowances through hire purchase or outright purchase.

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If it is not in a tax paying position or pays corporation tax at the small companies rate, then a lease could be more beneficial to the business. The leasing company will claim the capital allowances and pass the benefits on to the business by way of reduced rentals

Hire purchase has several advantages over a business loan:

1. Hire purchase is cheaper than a (‘unsecured’) business loan because the ownership of the car is retained by the finance company (ie; it is secured) and if monthly payments are not made, the vehicle is repossessed

2. Hire purchase is relatively quick as it is offered directly by most dealers and manufacturers and is agreed to more easily than a business loan to a company without an existing relationship with its bankers

3. Deposits are lower than with business loans

DISADVANTAGES OF HIRE PURCHASE

Compared with contract hire or contract purchase:

1. Often the finance company will expect all of the VAT for the whole value of the vehicle to be paid with the first installment, whereas with leasing the upfront payment is only the equivalent of three months payments

2. The monthly payment required is always much higher than for contract hire or contract purchase

3. Interest has to be paid on the full value of the vehicle, even if there is no intention to retain it for longer than 2-4 years

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4. Hire Purchase often has hidden fees and individual dealers are not incentivised to offer the best deal without negotiation so the best deal available will require some real effort to locate

5. The termination fee is significant if the circumstances of the business changes and the vehicle has to be returned

and compared with a business loan:

1. The business is not the owner of the vehicle from day one so it can not be modified or exported without permission.

THE BENEFITS OF CONTRACT HIRE OR PURCHASE FOR BUSINESSES/ COMPANIES

Whether or not you are familiar with the benefits of contract hire for businesses will most likely depend on the size of the business. This is the case whether it is owned by you or you are employed by the business. For example, if you own a business and you use your personal car for business purposes there are some large benefits that you are missing out on. Likewise if you are an employee using your own car for work purposes you could use salary sacrifice to cover the cost of your car whilst your employer funds it and you both take advantage of tax benefits.

Despite this, there are many businesses that have no idea of the benefits of leasing their vehicles and assets using contract hire. The most appealing benefits for using contract hire is that a business can avoid as much as 100% of VAT – provided the car is used 100% for business and not personal reasons. If it is used for personal reasons then you will be able to avoid 50% of VAT.

In summary, contract hire is an ‘operational lease’ that allows a business to lease a company car or asset by simply making a fixed monthly payment for a period that is typically between 2 and 4 years. At the end

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of the lease contract, the business returns the old company car or asset and obtains a new car or asset and a new lease contract.

In addition to the big VAT benefits the other advantages are:

• the business spends significantly less each month (as much as 60%) than it would need to spend on a loan or ‘hire purchase’ (it gets a ‘bigger bang for its buck’);• there is no need to arrange or negotiate to sell the vehicle or asset when a new one is required;• there is no market value risk arising from the vehicle because it does not need to be sold in the open market at any point;• the business can select the exact requirements online and have them delivered;• it is certainly cheaper than ownership over the long term if the business needs to run and replace new vehicles or asset more frequently than every five years or less;• the business can include all costs of maintenance and services in the monthly price;• the road fund licence will always be included for the first year of the lease contract and often for the life of the contract; and,• vehicles can be kept relatively new and this promotes a positive, successful image of the business.

THE BENEFITS OF HIRE PURCHASE AGREEMENTS TO THE CONSUMERS

Spread the cost of finance. Whilst choosing to pay in cash is preferable, this might not be possible for consumer on a tight budget. A hire purchase agreement allows a consumer to make monthly repayments over a pre-specified period of time; • Interest-free credit. Some merchants offer customers the opportunity to pay for goods and services on interest free credit. This is particularly

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common when making a new car purchase or on white goods during an economic downturn; • Higher acceptance rates. The rate of acceptance on hire purchase agreements is higher than other forms of unsecured borrowing because the lenders have collateral; • Sales. A hire purchase agreement allows a consumer to purchase sale items when they aren't in a position to pay in cash. The discounts secured will save many families money; • Debt solutions. Consumers that buy on credit can pursue a debt solution, such as a debt management plan, should they experience money problems further down the line.

THE DISADVANTAGES OF HIRE PURCHASE AGREEMENTS TO THE CONSUMERS

1. Personal   debt . A hire purchase agreement is yet another form of personal debt it is monthly repayment commitment that needs to be paid each month; 

2. Final payment. A consumer doesn't have legitimate title to the goods until the final monthly repayment has been made; 

3. Bad credit. All hire purchase agreements will involve a credit check. Consumers that have a bad credit   rating  will either be turned down or will be asked to pay a high interest rate; 

4. Creditor harassment. Opting to buy on credit can create money problems should a family experience a change of personal circumstances;

5.  Repossession rights. A seller is entitled to 'snatch back' any goods when less than a third of the amount has been paid back. Should more than a third of the amount have been paid back, the seller will need a court order or for the buyer to return the item voluntarily.

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BIBLIOGRPHY

http://en.wikipedia.org/wiki/Hire_purchase http://india.findlegalforms.com/product/hire-

purchase-agreement-india/

http://www.indiacom.com/yellow-pages/hire- purchase/

http://wikieducator.org/HIRE- PURCHASE_SYSTEM_(PART_I)

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