Updated July 19, 2023
Introduction to Hire Purchase
Hire purchase refers to the arrangement made mostly between two parties in which one party wants to buy some expensive asset by paying the amount in various installments and therefore, it is a kind of arrangement where the purchaser agrees to pay some amount (known as a down payment) to the supplier at the time of purchase and the balance amount is paid in various installments along with the interest that is charged at some fixed percentage.
Explanation
In a hire purchase agreement, there are two parties where one is the seller of the asset and one is the person who wants to buy such asset. In the arrangement, both parties mutually agree to enter into a contract in which the purchaser is supposed to pay the initial down payment at the time when the delivery of the asset is made and the remaining amount is paid in certain installments along with the interest. The delivery of goods in such cases is made at the time of paying the initial down payment but the ownership of the asset gets transferred to the customer only when the customer pays off all the dues to the vendor. If the customer fails to repay installments then the supplier has the right to get back possession of that asset.
Features of Hire Purchase
Features of Hire purchase are provided and discussed below-
- The payment of the installments is to be done by the buyer i.e., the hirer to the seller over the specified period of time.
- The buyer gets possession of the goods immediately.
- In case of any default of installment payment by the hirer, the vendor has the right to repossess the goods. In that case, the payment already received by the vendor from the hirer will be treated as hire charged for the period for which the goods were held.
- The ownership of goods is transferred to the buyer only upon the payment of the last installment.
- The hire purchase installment amount includes the principal amount as well as the interest charged upon it.
- Interest is generally charged on the flat rate
How Does Hire Purchase Agreement Work?
In the case of hire purchase, the purchaser of the asset is required to the down payment initially and not the amount of the whole selling price of the asset as the remaining amount after the down payment is paid in certain installments with interest. The terms and conditions related to the time period of repayment and the percentage of interest are mutually decided by both parties at the time of entering into a hire purchase agreement. The buyer of an asset has the right to use the asset just after paying the initial down payment amount but the ownership is not transferred until any installment remains unpaid.
We can say that the hire purchase agreement is like a rent-to-own transaction where the option is there with the lessee to purchase the asset anytime during the period of the lease agreement and since in the hire purchase the ownership is not transferred till the payment of the last installment, more protection is there to the vendor as the asset can be repossessed if there is any failure in payment of installment amount.
Example of Hire Purchase
Suppose, Mr. Gosh approached a vendor that deals with Air conditioners as he wanted to purchase an Air Conditioner (Ac) for his business worth $50,000. Mr. Gosh doesn’t have $50,000 in hand initially so he entered into an agreement with the vendor that initially he will pay $5,000 for the AC and the remaining $45,000 will be paid by him in 5 equal monthly installments of $9,000 along with the interest @10%p.a. that will be charged monthly on the outstanding balance. The terms & conditions also include that the ownership of the asset will be transferred after the payment of the last installment and if the customer fails to pay installments then the asset will be taken back. This whole arrangement is the hire purchase.
Types of Hire Purchase
Types are provided and discussed below-.
- Consumer Hire Purchase: In this type, the goods are hired by the buyer for non-business purposes i.e. for his personal use. This can also be for family or other household purposes apart from the business. The hirer here is not the business but the natural person.
- Industrial Hire Purchase: Contrary to the above, here, the hirer is not the natural personnel but the companies or the industries that take the goods on hire for their business purposes. Example: the hire purchase of machinery for use in industries.
Hire Purchase Costs
- The total cost of hire purchase includes the fees or other charges charged by the vendor plus the interest amount.
- If there is any agreement offering 0% interest, there can be other charges also which can be charged at the end of the interest-free period.
- Before entering into any hire purchase agreement, it is advisable to have an idea of all the fees and charges over the repayment period.
- The details of all the costs are to be given by the vendor by the law itself before entering into any agreement.
Advantages and Disadvantages
Below are the advantages and disadvantages mentioned:
Advantages
Below are the advantages mentioned:
- One need not pay the entire amount of the goods to use them. The goods can be used immediately by paying little cash initially.
- As the payment is spread over a period of time, the most expensive assets can also be easily utilized.
- With the help of hire purchase, all the future expenses are known well in advance which helps in better budgeting of finances.
- The buyer is not responsible for any depreciation on the assets. The owner. i.e. the vendor is responsible for depreciation payment.
Disadvantages
Below are the disadvantages are mentioned:
- As the amount of installments and the period is fixed in advance, if there exists any financial difficulty in the future for the buyer and if he is unable to pay any installment, the possession of the asset is taken over by the seller.
- The cost of the asset in case of direct purchase in cash is lower than the total cost paid in the hire purchase agreement as the hire purchase agreement includes the interest payment also.
- The ownership of the asset is not transferred till the payment of the last installment. Hence you can’t mortgage the asset in case of bankruptcy if you face it.
Conclusion
Therefore, Hire Purchase (HP) agreement is made when the buyer of the expensive asset is unable to pay the full selling price of the asset at a single point in time, therefore, with the consent of the vendor buyer agrees to pay some initial down payment at the time of delivery of asset and the remaining amount is paid in installments along with the interest. The vendor earns the interest income also besides the profit margins on such transactions and the buyer gets the benefit to use the asset without paying the full amount at once.
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This is a guide to Hire Purchase. Here we also discuss the introduction to Hire Purchase, how this agreement works along with advantages and disadvantages. You may also have a look at the following articles to learn more –
