Hire purchase

1. SRINATH.RAMAKRISHNAN

2. Origin & Development of hire
purchase
 Cowper wait & sons, a furniture dealer introduced the system of Hire purchase
in USA, in 1807.
 The origin of hire purchase system can be traced back to the advent of industrial
development in UK.
 Bishogate piano-maker introduced the system of Hire purchase in 1846, in UK
 In India, Hire purchase finance started only after WW I.
 However, it was only after WW II that it’s growth assumed visible dimensions.
 With the increase in economic activity, many Non-Banking financing companies
entered the scene in the fifties and sixties.

3. Hire Purchase
 Hire purchase is used to buy expensive items which a person cannot afford
to payout right: e.g. a car,ship,plane.
 A down payment is usually paid and the balance is paid over several months
(monthly installments).
What is hire purchase ?
 Here possession of goods is transferred immediately, but payment is made
in installments.
 Ownership is transferred after all the installments have been paid

4. Definition
 According to hire purchase act of 1972.³An agreement under
which goods are let on hire under which the hirer has an option
to purchase them in accordance with the terms of agreement
and include an agreement under which‡
 Possession of goods is delivered by the owner thereof to a person on the
condition that such person pays the amount in periodic payments‡
 The property of the goods is to pass to such a person on the payment of
the last installment.‡
 Such a person has a right to terminate the agreement any time before the
property so passes.

5. characteristics
 ‡Possession‡
 Ownership upon the full payment‡
 Installment buying‡
 Hire charges
 Return the goods
 Repossession
 It is the agreement between the hire vendor and hirer.

6. Operation of HP transaction
 Goods are let out on finance by a finance company to the
hire purchaser customer
 Buyer is required to pay an equal amount of periodic
installments during a given period
 Ownership transfers at the payment of the last installment

7.  Alternatively, instead of the down payment, the hirer as to
deposit an equal amount as a fixed deposit with the finance
company which provides entire finance on hire purchase
terms, repayable with interest in EMI over 36-48 months.
 Deposits and the accumulated interest is returned to the hirer
upon the payment of last installment.‡
 The hirer is required to make a down payment of 20-25% of
the cost and pay the balance amount along with interest in
advance or arrears over a time period of 36-48months

8. Process of Hire Purchase
 The Dealer, contracts with finance co. for financing his hire
purchase deals.
 The customer selects the goods for HP, and dealer arranges for
the complete set of documents.
 Down payment by customer on completion of proposal form.
 Dealer sends documents to finance co. with request to purchase
the goods, and accept the HP transaction.

9.  The finance co. signs the agreement and sends copy along
with EMI details to dealer.
 Dealer delivers the goods to the customer, property passes
on to the finance co..
 Hirer pays EMIs, and on last payment , the ownership
passes on to him, with loan completion certificate by the
finance co.

10. Advantages:
 ‡No immediate cash‡
 Easy possession
 Economic growth‡
 Reduced burden:
Low income people .
 Relief to buyer :
Easier to buy expensive things.
 Eventually own something that you cannot afford.

11. Disadvantages:
•Reputed buyers
• May lead to bankruptcy‡
•Buyer has to mortgage his property
•‡ Buyer may incur loss‡
•May lose paid installments in the event of default‡
• It is expensive‡ :
if Mr. A and Mr. B are both buying a particular brand and type of car that costs INR1,50,000 from the
same seller and Mr. A makes an outright payment for the car but Mr. B purchases the car on hire
purchase, then Mr. B is going to pay more for the car. Instead of buying it at INR1,50,000 Mr. B is going
to buy it INR1,50,000 plus what ever interest put on it by the seller.
•Loss to seller in the event of default by the buyer.

12. Contents of Hire-Purchase Agreement
According to the Act , every hire-purchase agreement shall state:
 The Hire-Purchase price of the goods to which the agreement relates.
 The cash price the goods, that is to say, the price at which the goods may be
purchased by the hirer for cash.
 The date on which the agreement shall be deemed to have commenced.
 The number of instalments by which the hire-purchase price is to be paid, the
amount of each of those instalment, and the date, or the mode of determining the
date, upon which it is payable, and the person to whom and the place where it is
payable.
 The goods to which the agreement relates, in a manner sufficient to identify them.

13. Eligibility to enter into HP
Transactions
 People with a regular and stable income, and capacity to
pay installments from the current income‡
 The person must be competent to enter into a contract
.Minor is not eligible‡
 Foreigners and people not having permanent residence in
the country are disqualified for availing such forms of
credit sales.

14. • Ownership of the Asset: In lease, ownership lies with the lessor.
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
instalment is paid.
•Depreciation: In lease financing, the depreciation is claimed as
an expense in the books of lessor.
On the other hand, the depreciation claim is allowed to the hirer in case of
hire purchase transaction.
Difference between H.P and Lease:

15.  Rental payments: The lease rentals cover the cost of using an asset.
Normally, it is derived with the cost of an asset over the asset life.
In case of hire purchase, instalment is inclusive of the principal amount and
the interest for the time period the asset is utilized.
 Duration: Generally lease agreements are done for longer duration and
for bigger assets like land, property etc.
Hire Purchase agreements are done mostly for shorter duration and cheaper
assets like hiring a car, machinery etc.
 Tax Impact: In lease agreement, the total lease rentals are shown as
expenditure by the lessee.
In hire purchase, the hirer claims the depreciation of asset as an expense.

16.  Repairs and Maintenance: Repairs and maintenance of the asset in
financial lease is the responsibility of the lessee but in operating lease, it is
the responsibility of the lessor.
In hire purchase, the responsibility lies with the hirer.
 Extent of Finance: Lease financing can be called the complete
financing option in which no down payments are required
but in case of hire purchase, the normally 20 to 25 % margin money is
required to be paid upfront by the hirer. Therefore, we call it a partial
finance like loans etc.

17. Examples:
 Funding a balance of £10,000.00
36 Payments @ £310.63
APR 7.8%
48 Payments @ £235.42
APR 7.7%
Funding a balance of £12,000.00
36 Payments @ £363.23
APR 7.4%

18.  Accounting Treatment for HP System:
(1) Accounting treatment for high value of goods:
-Asset accrual method.
-Credit purchase with interest method.
journal:
For purchase
Asset a/c Dr XXX
To hire vendor a/c XXX
(being down payment payable)

19.  For first installment:
Asset a/c Dr XXX
Interest a/c Dr XXX
To Hire vendor a/c XXX
(being 1st installment payable)
 For payment of 1st installment:
Hire vendor a/c Dr XXX
To cash a/c XXX

20.  For dep of the asset:
Dep a/c Dr XXX
To Asset a/c XXX
(being dep on asset)
 For closing dep and interest a/c:
p&l a/c Dr XXX
To Dep a/c XXX
To interest a/c XXX
(being transfer of dep and interest)

21. HIRE PURCHASE