What is Hire Purchase? Features, Advantages, Disadvantages

Hire purchase is a type of instalment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a predetermined rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase.

Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last instalment is paid to the owner (hiree). The hirer has the right to terminate the agreement at any time before the transfer of ownership of the asset.

In other words, the hirer has the option to purchase the asset. In case hirer decide to terminate the agreement, the hirer has to either

• return the asset and avoid payment of instalment due thereafter
• pay the future instalments either fully or at a discount as mutually agreed and take ownership of the asset.

The hire purchase system is regulated by the Hire Purchase Act 1972.

This Act defines a hire purchase as “an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which:

• The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic instalments.
• The property in the goods is to pass to such person on the payment of the last of such instalments, and
• such person has a right to terminate the agreement at any time before the property so passes”.

Hire purchase should be distinguished from instalment sale wherein ownership of the property passes to the purchaser with the payment of the first instalment. But in case of Hire purchase ownership remains with the seller until the last instalment is paid buyer gets ownership after paying the last instalment. The figure depicts a typical hire-purchase transaction between the parties.

Features of Hire Purchase Agreement

Hire purchase (as per Hire Purchase Act 1972, India) is a typical transaction in which the assets are allowed to be hired and the hirer is provided an option to later purchase the same assets. Following are the features of a regular hire purchase transaction:

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.

Advantages of Hire Purchase

Advantages of Hire Purchase system are:

• The buyer is greatly benefited as he has to make the payment in instalments. This system is greatly advantageous to the people having limited income.

Disadvantages of Hire Purchase

Disadvantages of Hire Purchase System are:

Total amount paid towards the asset in case of hire purchase system is higher than the cash price of assets.

Difference between Leasing and Hire purchase

Essentially, both lease financing and hire purchase are the options of financing the assets. These options vary from each other in many aspects viz. ownership of the asset, depreciation, rental payments, duration, tax impact, repairs and maintenance of the asset and the extent of finance.

These are discussed as follow:

Ownership of the Asset: In lease, ownership lies with the lessor (owner of asset). The lessee has the right to use the equipment and does not have an option to purchase. Whereas in hire purchase, the hirer has the option to purchase. The hirer becomes the owner of the asset/equipment immediately after the last installment is paid.

Legal Framework of Hire Purchase

There is no exclusive legislation dealing with hire purchase transaction in India. The Hire purchase Act was passed in 1972. An Amendment bill was introduced in 1989 to amend some of the provisions of the act. However, the act has been enforced so far. The provisions of are not inconsistent with the general law and can be followed as a guideline particularly where no provisions exist in the general laws which, in the absence of any specific law, govern the hire purchase transactions. The act contains provisions for regulating:

• The format / contents of the hire-purchase agreement
• Warrants and the conditions underlying the hire-purchase agreement,
• Ceiling on hire-purchase charges,
• Rights and obligations of the hirer and the owner.

In absence of any specific law, the hire purchase transactions are governed by the provisions of the Indian Contract Act and the Sale of Goods Act.

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