Hire Purchase: Meaning, Features, Advantages and Disadvantages

Meaning:
Hire purchase is a method of financing of the fixed asset to be purchased on future date. Under
this method of financing, the purchase price is paid in installments. Ownership of the asset is
transferred after the payment of the last installment.
Features of Hire Purchase:
The main features of hire purchase finance are:
1. The hire purchaser becomes the owner of the asset after paying the last installment.
2. Every installment is treated as hire charge for using the asset.
3. Hire purchaser can use the asset right after making the agreement with the hire vendor.
4. The hire vendor has the right to repossess the asset in case of difficulties in obtaining the
payment of installment.
Advantages of Hire Purchase:
Hire purchase as a source of finance has the following advantages:
i. Financing of an asset through hire purchase is very easy.
ii. Hire purchaser becomes the owner of the asset in future.
iii. Hire purchaser gets the benefit of depreciation on asset hired by him/her.
iv. Hire purchasers also enjoy the tax benefit on the interest payable by them.
Disadvantages of Hire Purchase:
Hire purchase financing suffers from following disadvantages:
i. Ownership of asset is transferred only after the payment of the last installment.
ii. The magnitude of funds involved in hire purchase are very small and only small types of
assets like office equipments, automobiles, etc., are purchased through it.
iii. The cost of financing through hire purchase is very high.
What are my rights and responsibilities as a hirer under a hire purchase agreement?
Your rights:

To receive a copy of the hire purchase (HP) agreement.

To obtain any information regarding the account.
To request a statement of outstanding balance (once every 3 months).
To settle early the full outstanding amount.
To terminate the agreement at any time.
Your responsibilities:

Read all the fine print in the written agreement.

Check that the purchase price and HP terms in the agreement are as agreed. Do not sign
blank or incomplete agreement/ forms.
Ensure that you can afford the instalment payments for the duration of the HP financing
and pay your instalments on time.
Know your rights and obligations under the HP contract so that you do not commit any
actions leading to a breach.

Keep all documents pertaining to the HP financing such as agreement, receipts, etc. in a
safe place.
Not to remove, sell or dispose off the motor vehicle without the consent of your banking
institution.
Inform your banking institution of any change of address.
Insure the motor vehicle after the first year and to update your banking institution within
14 days before the current policy expires.
Hire purchase involves a certain procedure, that is to say, modus operandi to be followed.
For 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:
(i) The hire purchase price of the goods to which the agreement relates;
(ii) The cash price of the goods, that is to say, the price at which the good is purchased for
cash;
(iii) The date of the commencement of the agreement;
(iv) The number and time interval of installments by which the hire purchase price is to
be paid;
(v) The name of goods, with its sufficient identity, to which the hire purchase agreement
relates to;
(vi) The amount to be paid, if any, at the time of signing the agreement;
(vii) The signatures of the parties involved in transaction.
If 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. The hire
purchase transaction is financed by some financial institution, and then there are three parties
involved in the transaction.
These are:
(i) Hire Vendor,
(ii) Hire Purchaser, and
(iii) Financial Institution.
In 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 installments fall due.
This entire process is depicted in the following Figure 20.1.
ADVERTISEMENTS:

Hire-purchase transaction benefits all parties involved in it. While it increases vendors
sales, it enables the hire purchaser to make use of costly machinery, equipments, etc., without
making full payment on the date of signing the agreement. After making the payment of the
last installment, the hire purchaser also acquires the ownership of the goods purchased under
hire-purchase system.
NSIC and Hire Purchase:
Small scale firms can acquire industrial machinery, office equipment, vehicles, etc.,
without making full payment through hire purchase. With the help of assets acquired through
hire purchase they can produce and sell. From the earning payments can easily be made in
installments. Ultimately the ownership of assets can be acquired.
Now several agencies like NSIC provide machinery and equipment to small scale units
on hire purchase basis and on lease basis

a.
b.
c.
d.
e.

a.

Requirements of hire-purchase agreements:

Hire-purchase agreements are required to
(i) be in writing and signed by parties thereto, [sec. 3];
(ii) state the following :
the hire-purchase price, i.e., the total sum payable by a hirer under a hirepurchase agreement in order to complete the purchase of the goods, [sec.3 (b)];
cash price of the goods, i.e., the price at which the goods may be purchased by
the hirer for cash;
deposit;
identification of the goods hired
the information as per the Schedule to the Act containing important rights of the
hirer. [Sec. 3 (2)]
Owner's implied obligations in hire-purchase
The following shall be implied as conditions/warranties in a hire-purchase agreement :
Implied warranties. - Notwithstanding anything contained in the hire-purchase agreement,
there shall be an implied warranty as to quiet possession of the goods by the hirer;

b.

that the goods shall be free from any charge or encumbrance in favour of any third
party at the time when the property is to pass. [Sec. 4]
Implied conditions.- The following conditions shall be implied notwithstanding anything in
the contract:a. condition as to title at the time when the property is to pass; [Sec. 4 (1) (b)]
b. condition as to merchantable quality, except as regards the defects of which the owner could not reasonably have been aware
at the time when the agreement was made, or
as regards defects specified in the agreement, or
where the hire has examined the goods, or a sample thereof, as regards defects
which the examination ought to have revealed, or
if the goods are second-hand goods and the agreement mentions this fact. [ Sec.
4 (2) ]
c. A condition as to fitness for a particular purpose shall be implied, where the hirer, whether
expressly or by implication:has made known to the owner the particular purpose for which the goods are
required, or
in the course of any antecedent negotiations has made known the purpose to
any other person by whom the negotiations were conducted. [Sec. 4 (3)]
d. Where the goods are let under a hire-purchase agreement by reference to sample, a
condition shall be implied as to correspondence of the bulk with the sample.[Sec. 4 (4)