Hire Purchase System: Ease of availing extravagant goods

A hire-purchase is a system of arrangement between two parties (i.e., seller and buyer) and involves buying assets in which the buyer makes payment to the seller in instalments. Thus, the buyer gets possession of the asset. The ownership of the goods remains with the seller until the final instalment payment.

The amount paid by the buyer to the seller is under an agreement between both the parties for paying in instalments with the interest rate levied on it.

If the buyer cannot make the full payment or defaults in making the instalments, the seller owns the right to regain possession of assets.

In this system, the buyer is the hirer, hiring the goods from the seller against a promise of purchasing the goods on full payment.

Features of the hire purchase system

Some significant features of the hire purchase system are as follows:

  • A hire-purchase agreement is governed by the Hire-Purchase Act 1972.
  • The act is another form of credit sale in which the amount is recovered from the consumer at a future date.
  • The price of the goods, assets, or any form of property is paid in instalments based on a fixed interest rate.
  • The instalment amount includes the principal amount and interest rate levied on it.
  • The buyer gains possession of goods by making the first agreed down payment against the assets.
  • The assets’ ownership is transferred to the buyer on the payment of the last instalment.
  • In the event of default in payment of instalments by the buyer or hirer, the seller can repossess the goods or assets.
  • The amount of payment made up to the default period is forfeited and considered as hire charges.
  • The buyer of the assets or goods cannot damage, sell, transfer, hire out, pledge the goods between the hire period.
  • The buyer can return the goods anytime without making further payments.

Types of Hire-Purchase

Hire-purchase system are of two types:

  • First, the financer or creditor purchases the goods on behalf of the customer directly from the seller and executes a hire-purchase agreement with the customer.

    When the customer makes the payment of all the instalments to purchase the goods under the agreement, the customer is designated as the owner of the goods.

    The finance pays the amount of consideration against the goods to the seller and recovers the amount from the buyer (i.e. customer) under a specific interest rate.

  • Second, the customer executes a hire-purchase agreement directly with the seller. The seller keeps possession of the goods until the hirer or buyer makes full payment of all the instalments along with the interest rate.

Under the hire-purchase agreement, in both cases, in case of default in payment, the financier or the seller can forfeit the financed goods or assets.

Advantages and disadvantages of the hire purchase system

The advantages and disadvantages of the system are as follows:

Advantages of the hire purchase system

  • A hire purchase agreement allows a person to afford an asset of an excellent value in the easiest possible way.
  • A hire purchase system provides considerable flexibility in the payment per an individual’s comfort. An individual can pay a greater amount of down payment for less instalment period or less interest amount or can make less down payment and increase the instalment period as per his convenience.
  • The interest rate offered will remain fixed throughout the instalment period and will not depend on any external factor or market conditions or decision by the financier or bank.
  • After full payment, the buyer transfers the asset ownership to relieve him of any further liabilities using the asset.
  • The hire purchase agreements allow an individual to make early payments to reduce long-term liability and interest rate.

Disadvantages of the hire purchase system

  • In a hire purchase system, the title over the goods is not passed to the hirer or purchaser until full payment. Therefore, the purchaser cannot sell, pledge, the goods or assets for his benefits for which he is making the payments.
  • The overall selling price remains higher than the actual cost of the goods or assets because of the interest rate. These interest rates are fixed, but the interest charges increase if the instalment period is high.
  • Hire purchase agreements are available to buyers with poor credit scores. Buyers with a poor credit score or no credit score may not be eligible for deals with lower interest rates.
  • In a short-term agreement under the hire-purchase system, the higher interest rate renders the deal unfair.
  • The default in payment reflects the individual’s credit profile, which reduces the credit score of the individual. Poor reviews by the financier will affect the credit profile, creating issues to avail loans in the future.

Instalment Purchase System

An instalment purchase system is also an arrangement for paying a certain amount on goods in instalments by the seller to the buyer. The payment is the same as the hire-purchase system, but the main difference is that title on the goods is transferred simultaneously with the possession of the goods.

The buyer becomes the owner of goods from the time he obtains its possession transferred to him by the seller on entering into a contract.

If the buyer defaults in payment, the seller cannot repossess goods. The seller has the right to enforce the contract made between them in the court of law for the recovery of the due amount on the buyer’s part against the seller.

The sale of goods act 1930 governs the instalment purchase system in India

Features of the instalment system

The instalment system has the following features:

  • An instalment purchase system is the same as a credit purchase.
  • The buyer makes the payment for a certain amount of money, also known as a down payment, to the seller to enter into a contract to purchase goods with them.
  • The seller enters into a contract of sale with the buyer against the consideration amount to be paid in instalment over a period of time.
  • The buyer obtains the possession and title over the goods soon after entering into a contract.
  • In the event of a default, the seller cannot repossess goods.
  • Unlike the hire-purchase system, the seller cannot even forfeit the already paid instalment amount.
  • The seller can seek the remedy from the court of law by enforcing the contract to recover the due amount.
  • The contract of the goods’ purchase incorporates the instalment period, the amount of instalment, and the interest.
  • In this system, the buyer is authorised to sell, pledge, and destroy the goods. He is also authorised to use the goods as per his will for clearing the instalments.


The hire-purchase system and the instalment purchase system are the most prevalent systems for purchasing expensive goods and assets out of budget.

In comparison, the instalment purchase is better than the former for purchasing. The title of goods is transferred simultaneously with goods possession to the buyer to satisfy his future needs and authorises him to settle dues on default.

A con of the hire-purchase system is that on account of default in payment, the previously paid instalments are forfeited, and goods are taken back, which is unfair at some point.

Overall, both purchase systems support ‘ease of doing business’ for business houses. They also provide consumers with an option to purchase the goods of their own choice by choosing the instalment period as per their will.


Which legislation governs the hire purchase system in India?

The Hire-Purchase Act 1972 governs the hire purchase system in India.

Which legislation governs the instalment purchase system in India?

The sale of goods act 1930 governs the instalment purchase system in India.

What is the depreciation on the assets purchased through the hire-purchase system based on?

The depreciation on the assets is based on the cost price of the asset

What is the hire-purchase price?

The hire-purchase price is the total amount of money required to complete the purchase of the goods, including the amount paid as a down payment or initial payment in a hire-purchase agreement. It does not include penalty, compensation or damages for breach, or any other amount.