What is hire purchase system?
The hire purchase system refers to a system in which the seller delivers goods to the buyer without transferring ownership. The buyer makes payments for the goods in installments. If the buyer pays all the installments, ownership of the goods will be transferred upon payment of the last installment.
The hire purchase system is a unique method of buying and selling goods on credit. In this system, the buyer (referred to as the hire-purchaser) and the seller (referred to as the hire-vendor) make a written agreement for the purchase and sale of specific goods, typically durable items. The goods are delivered to the hire-purchaser immediately upon signing the agreement, with the condition that the purchase price will be paid in specified periodic installments.
A hire purchase system, also called a hire purchase agreement or installment plan, is a financial setup that lets customers purchase goods or assets by making payments in installments. This system provides an easy and flexible option for those who may not have the immediate funds to make full payment. Generally, this type of purchase system applies to durable goods such as cars or household appliances. It involves making a down payment and then paying the remaining cost in regular instalments over a fixed period.
The process of starting a Hire Purchase agreement involves the buyer making an initial deposit and then continuing to make regular payments over a set period. This system enables the customers to enjoy the advantages of using these goods or assets while dividing the cost over time.
According to J.R. Batliboi, “Under this system, goods are delivered to a person who agrees to pay the owner by equal periodical installment, such installments are treated as the hire of those goods until a certain fixed amount has been paid when those goods become the property of hirer”.
Hire Purchase: Acquiring Capital Assets through Installments
Hire purchase is a method of acquiring a capital asset for use without immediately paying its full price. In a hire purchase arrangement, goods are leased to the hirer (user), who is permitted to pay the purchase price through installments and has the option to buy the goods after completing all payments. Ownership of the asset is transferred to the hirer upon the payment of the final installment. The amount and number of installments are predetermined at the time of delivering the asset to the hirer.
If the hirer defaults on any installment payment, the seller has the right to reclaim the asset. Alternatively, the hirer may choose to return the asset to the seller without the obligation to fulfil the remaining installments. In this context, the installments are considered hire charges. Consequently, the ownership of the asset remains with the seller (hiree) until the hirer exercises the right to purchase by completing all installment payments.
Hire Purchase Transaction Process
Understanding the Hire Purchase Transaction Process. The key Steps are as follows
i) The seller (hiree) procures the asset from the supplier/manufacturer and leases it to the hirer. The hirer is required to make a cash down payment, typically around 20-25% of the asset’s cost.
ii) The remaining cost of the asset, along with interest, is paid by the hirer through equated monthly instalments (EMIs). This payment period is predetermined, usually ranging from 36 to 48 months, and can be in advance or arrears.
iii) Alternatively, a fixed deposit can be made with the seller in lieu of a cash down payment, and the entire cost is recovered through EMIs. The seller returns the amount of the fixed deposit along with interest to the hirer upon completion of the last instalment.
iv) Each instalment includes the following:
- (a) cost of the asset and
- (b) interest.
Interest is computed using a flat rate and then applying the effective rate to the reduced balance of the original asset cost, resulting in a higher effective interest rate.
v) The hirer has the right to terminate the hire purchase contract by providing proper notice to the seller (hiree).
It’s important to distinguish a hire purchase transaction from an instalment payment sale. In the latter, ownership is transferred to the buyer upon the payment of the first instalment, and the buyer does not have the right to terminate the agreement before settling all instalments.
Flexible Payment Options with the Hire Purchase System
To make it easier for buyers to afford more expensive items, many businesses offer the option to purchase their products in instalments. With this arrangement, customers receive the goods right away after signing the contract, and they are then required to make manageable periodic payments, which can be weekly, monthly, quarterly, half-yearly or annually.
Additionally, the Hire Purchase System provides flexibility to customers in terms of payment options. Buyers can choose the duration of the agreement and the amount of the regular payments, depending on their financial capabilities. This system enables customers to engage in more effective financial planning and budgeting by allowing them to adjust payments to match their circumstances.
Furthermore, the Hire Purchase System generally offers maintenance and servicing packages to make sure the goods or assets stay in optimal condition during the agreement. This can be quite helpful for businesses that depend on their equipment or vehicles running efficiently.
Hire Purchase System offers a practical and budget-friendly solution to people and businesses who are looking to acquire goods or assets. The flexibility, convenience, and ability of the hire purchase system to distribute the cost over time makes it a suitable option for those who may not have the immediate funds. By using this system, customers can enjoy the benefits of ownership while managing their financial resources effectively.
Hire Purchase System Meaning
The key feature of this system is that the purchaser receives the goods upon signing the agreement and gains the right to use them. However, the purchaser gains ownership rights after completing all installments. Consequently, until the final installment is paid, the title to the goods remains with the hire vendor. The result of this arrangement is that in the event of a default by the hire purchaser in the payment of any installment, the vendor can repossess the goods.
The hire purchaser has the authority to end the agreement before the final installment payment, but they give up their claim to the installments they’ve already paid. Until the hire purchaser completes the last installment, the vendor classifies the payments as hire charges. This system earns the name “hire purchase system” due to this feature. It’s important to note that after the return of goods by the hired purchaser, they will not be liable for future installment payments.
Characteristics of Hire Purchase System
1. Credit Sale of Goods – Goods are sold on credit.
2. Payment in Installments: Upon signing the agreement, the purchaser pays an initial amount, with the rest scheduled in periodic installments.
3. Total Payments Exceeding Cash Price: The total amount payable by the purchaser, referred to as the hire purchase price, is consistently higher than the cash price, which is the full payment amount for the goods. The excess represents the interest for deferred payment and the hire purchase charge.
4. Possession of Goods – The hire purchaser acquires the right to use the goods immediately upon signing the hire purchase agreement.
5. Right to use the Goods – The Purchaser acquires to right to use the goods immediately after taking them in his possession.
6. Title of Goods – Ownership of the goods remains under the vendor’s control until the purchaser submits the last installment.
Features of Hire Purchase System
1. The hire purchase system comprises an agreement between the hire vendor and the hire purchaser.
2. The hire purchaser becomes the owner of the asset upon making the final installment payment.
3. The hire vendor has the right to repossess the asset in case of difficulties in obtaining the payment of instalment.
4. The purchaser is responsible for making payments in installments.
5. In hire purchase, the installments consist of both interest and principal repayments.
6. Usually, the hiree charges interest on a flat rate.