HIRE PURCHASE SYSTEM
INTRODUCTION:
Hire Purchase System is a special system of purchase and sale. When goods are purchased on hire-purchase
system, purchaser pays the price in instalments, these instalments may be Monthly, Quarterly or Yearly etc.
Goods are delivered to the purchaser at the time of Hire Purchase Agreement but purchaser will become the
owner of goods only on the payment of the last instalments. All the instalments paid are treated as hire till the
last instalment is paid off.
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.Hire purchase means a transaction where goods are
purchased and sold on the terms that:
(i) Payment will be made in installments,
(ii) The possession of the goods is given to the buyer immediately,
(iii) The property (ownership) in the goods remains with the vendor till the last installment is paid,
(iv) The seller can repossess the goods in case of default in payment of any installment, and
(v) Each installment is treated as hire charges till the last installment is paid.
DEFINITION:
Under the Hire-purchase system, goods are delivered to a person who agrees to pay the owner by
equal periodical instalments, such instalments are to be treated as hire of these goods until a certain
fixed amount has been paid, when these goods become the property of the hirer. J.R.Batliboi
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FEATURES OF HIRE PURCHASE SYSTEM:
Possession:
The hire vendor transfers only possession of the goods to the hire purchaser immediately after the
contract for hire purchase is made. The person who has hire the goods will give regular installment
or rent to the owner of the good which will include some portion of principal amount and some
portion of interest as agreed by both the parties. The hire vendor transfers only possession of the
goods to the hire purchaser immediately after the contract for hire purchase is made.
Installments :
The goods are delivered by the hire vendor on the condition that a hire purchaser should pay the
amount in periodical installments. Every installment is treated as hire charge for using the asset.
Down payments :
The hire purhcases generally makes a down payment e.e. an amount on signing the agreement.
Constituents of hire purchase installments :
Each installement consists partly of a finance charge (interest) and partly of a capital payment. Hire
purchaser can use the asset right after making the agreement with the hire vendor.
Ownership :
The property in goods is passed to the hire purchaser on the payment of the last installment and
exercising the option conferred upon him under the agreement. The ownership of good passes only
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when the person has paid the last installment of the goods which he or she has hired. The hire
purchaser becomes the owner of the asset after paying the last installment.
Re-possession:
in case of default in respect of payment of even the last installment, the hire vendor has the right to
take the goods back without making any compensation. Under hire purchase system the buyer can
return the goods to the seller if he or she does not want to continue with the agreement. The hire
vendor has the right to repossess the asset in case of difficulties in obtaining the payment of
installment.
Transfer of goods:
In case of hire purchase the person who has taken the good on hire cannot transfer the goods to a
third party as he or she does not have the ownership of the goods.
DIFFERENCE
BETWEEN
HIRE
PURCHASE
SYSTEM
AND
INSTALLMENT SYSTEM:
Both hire purchase and installment sale are popular methods of financing goods. These methods are
different to each other in terms of their option to purchase, a right of termination, and transfer of
ownership.Hire purchase is defined as an arrangement between hirer (buyer or User) and seller of
an asset whereby the seller allows the hirer to use the asset for a regular payment of installment for
the purchase price. The buyer also has the option to purchase the goods on payment of all the
installments. Whereas installment purchase is defined as another method of financing the capital
goods / assets whereby the goods are purchased by the buyer but the payment is made in smaller
installments.
BASIS OF
HIRE PURCHASE SYSTEM
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INSTALLMENT SYSTEM
DIFFERENCE
In the case of hire purchase, the act In
the
case
of
installment
of purchasing takes place only when purchase, the purchase happens
whole payment is made to the as soon as the agreement between
financing company. It means after the buyer and financing company
making payment of the last hire is entered into. purchase and
Time of
charges / installment only, the goods ownership take place before the
Purchase and
are considered purchased or if the complete payment.
Ownership
buyer or hirer prepays in a lump sum
in between the agreed period for
purchasing
the
purchase,
both
goods.
In
hire
ownership
and
purchase is delayed till the complete
payment
The hirer, in the case of hire There is no such right or option
purchase agreement, has an option / available to the buyer in case of
Option / Right
to Terminate:
right to terminate the agreement and installment purchase. This is
return the goods
because the purchase has not
taken place in case of hire
purchase but it takes place at the
beginning only.
The monthly or period payment in The monthly or period payment
hire purchase system is called as hire in installment purchase is termed
charges. the hire charges is a as
Installment /
Hire Charges:
installment.
Installment
function of two additional factors derives its value from the length
viz. option of termination and repairs of time, the sale value of an
and maintenance. Therefore, hire asset, and interest rate. Ideally,
purchase is an expensive system the installment should be less
compared to installment purchase.
than the hire charges for the same
asset.
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In hire purchase, all the risks are
Risk, Repair
and
Maintenance
related to Asset:
In installment purchase, the risks
born by the financing company till are borne by the buyer from day
the last payment by hirer because it one.
Similarly,
repair
and
is the official owner of the asset till maintenance is the headache
that time. Similarly, repair and of buyer in case of installment
maintenance is the headache of purchase.
financier in the case of hire purchase
The right to sell or transfer is always In
the
case
of
installment
exercised by the owner of the assets. purchase, it is with the buyer
Right to Sell or
Transfer:
In the case of hire purchase, this because he becomes the owner
right lies with the financing company on
the
day
he
signs
the
or seller as the case may be because agreement. The right to sell or
they are the owners of the asset.
transfer is always exercised by
the owner of the assets.
The default of
When a hirer defaults in the payment Whereas in installment purchase,
Installment /
of hire charges, the financier has the the installment paid are not
Hire Charges:
right to forfeit the money paid till forfeited and the financier is
that
date
and
take
back
possession of the goods.
the liable to receive the remaining
dues.
In essence, the hire purchase system Installment system is useful for
is suitable for the buyers who need those who are sure of utilizing
the asset for short period or are not the asset till its lifetime and those
Suitability
sure of long term needs. The cushion who
are
capable
of
taking
of returning the asset gives them this responsibility of the asset in
leverage.
terms
of
its
repairs
and
maintenance and its wear and
tear.
CONCLUSION:
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Hence from the above one can see that there are many differences between hire purchase and
installment purchase and buyer should carefully analyze both the option before deciding whether to
go for hire purchase or installment purchase.
REFERENCE:
http://www.yourarticlelibrary.com/accounting/hire-purchase/hire-purchase-system-andinstallment-system-differences/54791/
dynamictutorial.blogspot.com/2012/07/hire-purchase-and-installment-purchase.html
www.smilingexpert.com/difference-hire-purchase-system-instalment-payment-system/
http://www.businessmanagementideas.com/hire-purchase/hire-purchase-meaning-featuresand-legal-position/4294
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