Concepts of hire Purchase
Sometimes, entrepreneurs may not be in a position to pay the full cost of the asset. In such situations, they can opt for hire purchase. The entrepreneur who wishes to hire asset can enter into hire purchase agreement with the owner of the asset.
What is Hire Purchase agreement?
Hire-purchase agreement is an agreement under which goods are let on hire by the owner to a person known as hirer who agrees to pay charges in periodical installments. The hire purchaser pays rental in the form of installments which includes both principal as well as interest.
Transfer of Ownership in Hire Purchase
The ownership in the goods passes to the hire purchaser or hirer only on payment of the last installment. The hirer may use the asset without owning it. If the hire purchaser makes any default, the person who has the ownership title, has the right to seize the asset.
Parties involved in Hire Purchase
Usually three parties are involved in hire purchase
1. The dealer who sells goods on hire purchase
2. The customer who buys the good on hire purchase known as hirer.
3. Financier or finance company which provides finance for hire purchase.
Terminologies used in Hire Purchase
“Hirer” means the person who obtains or has obtained possession of goods from an owner under a hire-purchase agreement.
“Hire-purchase price” means the total sum payable by the hirer under a hire purchase agreement.
Hire Purchase Procedure
A down payment is made by the hirer. The dealer receives the bill of exchange from the hirer. The dealer discounts the bill of exchange with the finance company. The finance company collects the payment from the hirer.
Under hire purchase, the finance company retains legal ownership of the equipment, at least until the end of the agreement. The ownership in the goods is transferred on the payment of last installment by the hirer.
Advantages of Hire Purchase
1. Hire purchase financial service provides finance to hire purchaser to hire the product at ease, which cannot be afforded by them.
2. The hirer can enjoy the asset without making full payment for the asset.
3. The hirer pays only the payment in installments. Hence, the outflow of cash will be less when compared to the benefits derived from the asset.
4. Depreciation can be claimed by the hirer on the asset hired.
5. The regular nature of the hire purchase payments are of fixed amount. Hence it helps the business to forecast cash flow.
6. Hire Purchase transactions fetches tax benefits. The tax benefits are available under Income Tax Act and Central Sales Tax Act.
7. Hire purchase agreements enables the hire purchaser or hirer to return the goods if the performance is not satisfactory.
8. Hirer can terminate the contract before making the final payment.