HIRE PURCHASE SYSTEM

• Hire purchase is used to buy expensive items which a person cannot afford to payout right: e.g. a car
• A down payment is usually paid and the balance is paid over several months (monthly instalments). 
• 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

• According to hire purchase act of 1972.³Anagreement 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

• 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
• 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 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 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.

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.
• 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.

Eligibility to enter into HPtransactions

• 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.