Concept of Hire Purchase System
Hire purchase system refers to the system wherein, the seller of goods delivers the goods to the buyer without transferring the ownership of goods. The purchase and sale of goods under a hire purchase system are different from cash sale and credit sale. In case of a cash sale, the buyer pays the lump sum to the seller and immediately ownership is passed along with the goods. Under this system, the purchaser pays the price of the goods in installments. While in credit sale the payment is made in the future. The payment for the goods will be made by the buyer in installments. In both cases, the ownership and possession of goods pass on the buyer. However, a hire purchase system is a special system of purchase and sale. If the buyer pays all the installments, the ownership of the goods will be transferred, on payment of the last installment.
- Hire purchase is an agreement between two parties called Hire vendor and Hire purchase.
- The hire purchaser becomes the owner of the asset after paying the last installment.
- The hire vendor has the right to repossess the asset in case of difficulties in obtaining the payment of installment.
- Payment will be made in installments.
- The installments in hire purchase include interest as well as repayments of principal.
In hire purchase system, the buyer acquires the property by promising to pay necessary installment payment of monthly, quarterly, half-yearly or any other period. The period of payment has to be fixed while signing the hire sell agreement. Though the buyer acquires the asset under hire purchase system after signing the agreement, the title of ownership remains with the vendor until the buyer squares up to his/her entire liability. When the buyer pays the final installment and any other obligation according to hire purchase agreement, only then the title of ownership of the goods would be transferred to hirer. If the hirer makes default in the payment of any installment, the hire vendor has the right to repossess the goods.
- Hire-purchase is a credit purchase.
- The price under the hire-purchase system is paid in installments.
- The goods are delivered in the possession of the purchaser at the time of commencement of the agreement.
- Hire vendor continues to be the owner of the goods till the payment of the last installment.
- The hire-purchaser has a right to use the goods as a bailer.
- The hire-purchaser has a right to terminate the agreement at any time in the capacity of a hirer.
The hire purchase price of goods is normally higher than the cash down the price of an article because it includes interest as well as cash price. Under the hire purchase system, the vendor is responsible to repair the goods which are in the possession of the buyer provided that the buyer takes the utmost proper care of the goods acquired. The risk is also borne by the vendor until the payment of the last installment.
Hire Purchase has the following advantages:
- Immediate use of assets without paying the entire amount.
- Expensive assets can be utilized as the payment is spread over a period of time.
- Fixed rental payments make budgeting easier as all the expenditures are known in advance.
- Easy accessibility as it is secured financing.
Hire Purchase suffers from the following disadvantages:
- The total amount paid towards the asset could be much higher than the cost of the asset due to substantially high-interest rates.
- The long duration of the rental payments.
- Ownership only at the end of the agreement. The hirer cannot modify the asset till then.
- The addition of any covenants increases the cost.