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agree to pay for goods in parts or a percentage at a time. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner Definition : According to hire purchase act of 1972.An 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. Operation of HP transaction The finance company purchases the equipment from the supplier and gives it on hire. 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 Alternatively, instead of the down payment, the hirer as to deposit an equal amount as a fixed deposit with the finance co 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 interest on each hire purchase installment is computed on the basis of flat rate of interest is applied to the declining balance of original loan amount to determine the interest component of installment for a given flat rate of interest, the equivalent effective rate of interest is higher.
To be valid, HP agreements must be in writing and signed by both parties. They must clearly set out the following information in a print that all can read without effort: 1. a clear description of the goods 2. the cash price for the goods 3. the HP price, i.e., the total sum that must be paid to hire and then purchase the goods
4. the deposit 5. the monthly installments (most states require that the applicable interest rate is disclosed and regulate the rates and charges that can be applied in HP transactions) and 6. a reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period). 7. The right of the hirer to terminate the contract when he feels like doing so with a valid reason. If the seller has the resources and the legal right to sell the goods on credit (which usually depends on a licensing system in most countries), the seller and the owner will be the same person. But most sellers prefer to receive a cash payment immediately. To achieve this, the seller transfers ownership of the goods to a Finance Company, usually at a discounted price, and it is this company that hires and sells the goods to the buyer. This introduction of a third party complicates the transaction. Suppose that the seller makes false claims as to the quality and reliability of the goods that induce the buyer to "buy". In a conventional contract of sale, the seller will be liable to the buyer if these representations prove false. But, in this instance, the seller who makes the representation is not the owner who sells the goods to the buyer only after all the installments have been paid. To combat this, some jurisdictions, including Ireland, make the seller and the finance house jointly and severally liable to answer for breaches of the purchase contract.
3. With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating 4. Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost. Basically hirer have following rights- 1. Rights of protection 2. Rights of notice 3. Rights of repossession 4. Rights of Statement 5. Rights of excess amount
Leasing
v/s
hire purchase
Leasing Ownership of the property lies with lessor, not transferred to lessee. Lessor, is entitled to claim depreciation tax shield. Capitalization of the asset is done in the books of lessor The entire lease payments are eligible for tax computation in the books of lessee Lessor income declines as the investment o/s in lease declines The lessee has to maintain the leased asset in case of financial lease, up keep is the responsible of lessor in case of operating lease. Not suitable for low capital enterprises An asset given by a leasing company is treated as fixed asset of lessor All receipts from lessee is taken into lessor p&l a/c
Hire purchase The hirer can claim benefit of salvage value as the owner of the asset. H.P is used as a source of finance usually for acquiring relatively low cost assets i.e., automobiles, office equip Down payment is required to be made for acquiring the assets and a margin maintained to the extent of 20-25% Asset bought on hire purchase will be shown as asset The hirer is responsible to ensure the maintenance of asset bought. It is highly suitable for low capital enterprises which need to show a strong asset position in their balancesheet The hire vendor normally shows the asset let under HP either as stock in trade or receivables Only interest portion is taken into vendor p&l a/c
Rate of Interest: