The hire purchase agreement is an agreement in which the owner of a particular set of goods allows a person (the hirer) to hire goods on monthly instalments. The hire purchase agreement includes a provision for purchasing expensive consumer goods such as automobiles, televisions, heavy machinery, among others.
The hire purchaser could purchase goods by making an initial down payment and paying the remainder in instalments. After payment of the final instalment, the hirer becomes the owner of the item.
Such hire purchase agreements are extensively used to finance many industries, especially heavy machinery. Therefore, buyers use the hire purchase agreement in situations in which they cannot pay for an item lump sum but can afford the item in instalments at regular intervals.
Furthermore, the hire purchase agreement differs from a contract of sale and is a bailment agreement in which the hire-purchaser has the right to use but not own goods until the expiry of such hire purchase agreement so the full payment is made.
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Contents of the Hire Purchase Agreement
According to Section 4 of the Hire Purchase Act, the following are the contents of a Hire Purchase Agreement:
- The hire-purchase price of the goods covered by this agreement
- The price at which the hire-purchaser can purchase goods in cash
- The start date of the contract
- The number of instalments, the amount to be paid on each instalment, the date, and the method of determining the date, place, and to whom the amount is to be paid are all specified
- The goods covered by this agreement and the method for identifying them
- The payment method, whether the payment is lump sum, cash, or by check. The hire purchase agreement must state if a portion of the payment must be made in cash or by check
Types of Hire-Purchase Agreements
Hire purchase agreements are of two types:
- The first type of agreement involves the financier, who purchases goods from the seller on the hirer’s behalf and transfers them to the hirer on the payment of the final instalment.
In this case, the financier owns the goods, pays the purchase price to the seller, and can recover it from the hire-purchaser. The financer has the right to seize the goods if payment is not made. Currently, hire-purchase agreements in India are triangular, with the seller, financier, and hire-purchaser all participating. Most sellers work with finance companies to arrange a hire-purchase with the hire-purchaser.
- In the second type of agreement, the hire-purchaser agrees with the seller, pays the purchase price, and becomes the owner of the goods on the payment of the final instalment.
In this case, the seller has the right to seize goods if payment is not made.
Working of the Hire-Purchase Agreement
In the case of hire purchase, the purchaser must make a down payment rather than the entire selling price of the asset, and the remaining amount is in instalments with interest.
Both parties mutually agree on the terms and conditions of the repayment period and the percentage of interest when they enter into a hire purchase agreement. The buyer of an asset has the right to use the asset immediately after making the initial down payment, but ownership is not transferred until any outstanding instalments are paid.
A hire purchase agreement is similar to a rent-to-own transaction in which the lessee can purchase the asset at any time during theterm of the lease agreement. Because ownership is not transferred until the last instalment is paid, the vendor has more protection as the asset can be repossessed if the instalment amount is not paid on time.
Advantages of a Hire Purchase Agreement
- Making payments for the goods is convenient. On payment of instalments, the hire-purchaser can become the owner of the goods.
- This type of transaction benefits the seller because it increases the sales volume and the profit from sales.
- The amount received by the seller from the instalments incorporates the original price and interest, and the interest is calculated in advance and added to the instalment price of the hirer.
- In the case of a default in payment by the hire-purchaser, the goods should be returned to him.
Disadvantages of a Hire Purchase Agreement
- When purchasing the product outright, the hirer must pay a higher price for the asset, and the interest rate is built into the cost price.
- Most hire-purchase agreements are typically lengthy and stringent.
- In the instance of a default, the seller repossesses the goods.
- The hire-purchase agreement inflates the demand of the asset. The hire-purchaser is enticed to buy the goods even though he cannot afford to do so.
- Under this system, the seller is also at risk, even though he has the right to reclaim the goods on fail to make the payment on time. Second-hand items command a low price and a small number of buyers.
Termination of Hire Purchase Agreement
- Such a hire purchase agreement could be terminated per its terms. Typically, the agreement specifies the circumstances under which the agreement is terminated.
- It is either through the goods’ return or through notice of termination. It is done either by the seller in the event of a breach on the part of the hire-purchaser or by the hire-purchaser.
- The agreement can be terminated through performance, which occurs when the hire-purchaser purchases the goods from the seller after paying all instalments.
- The agreement also gets terminated when the parties agree to renew it or enter into a new agreement by terminating the existing one.
Registration of Hire Purchase Agreement
Section 5 of the Stamp Duty Act requires the payment of stamp duty to register the hire purchase agreement. In India, each state levies a different stamp duty, and the hire Purchase agreement need not be registered.
The hire-purchase system is the best method to hire goods, which are generally expensive to buy, and subsequently own them if desired. However, such a hire purchase agreement is expensive because interest is added to the instalment amount.
FAQs on the Hire Purchase Agreement
What are hire purchase rules?
All involved parties in the agreement should sign the hire-purchase agreement in writing. The purpose of the act is to protect consumers, and this act does not apply to all items and goods covered by the hire purchase law.
What happens if you fail to pay according to the hire purchase agreement?
If one fails to make payments on an HP agreement, the creditor will contact the defaulter. The creditor will issue a default notice if the defaulter does not repay the arrears within 3 months. They could take action to repossess goods after issuing the default notice.
What are the tax consequences of the hire-purchase agreement?
In the case of hire-purchase transactions, the hire-vendor pays tax on the income inherent in the hire instalments rather than on the entire hire rental. Therefore, the tax is only levied on the income, not the inflow.
Is GST levied on hire purchase?
The ownership of the goods passes to the buyer on the payment of the final instalment in a hire purchase transaction. Therefore, GST is applicable on hire purchase transactions because they are covered by entry 1 (c) of Schedule II of the CGST Act.