Things to Know About Hire Purchase

The provisions of Chapter IX of THE INDIAN CONTRACT ACT governs the Hire contract. It typically covers everyday finance agreements such as purchasing consumer durables such as automobiles, computers, and household appliances such as televisions and refrigerators.

This hire purchase method is also used in the industrial sector to finance the purchase of machinery and other items.

The transaction’s basic principle is that the determined instalment is regarded as hire (rental) until the agreement provides such payments. Following the determination of the specified period, the Hirer has the option of paying a nominal fee to become the owner of the goods.

MEANING OF HIRE PURCHASE

WHAT IS A HIRE PURCHASE?

A hire purchase (HP), also known as an instalment plan or the never-never, is a contract in which a customer agrees to pay an initial instalment and then repays the balance of the asset’s price plus interest at a set time.

Closed-end leasing and rent to own are terms used to describe similar practices.

The British introduced hire-purchase agreements to India after they originated in England. The major judicial precedents and English law governed such transactions at first.

The Hire Purchase Act 1972, a specialised act to govern the same, was never enforced and was eventually repealed in 2005, giving rise to a fascinating March of Law that begs investigation.

WHAT IS THE HIRE PURCHASE ACT?

The Hire Purchase Act of 1972 governs the hire purchase system.

Hire purchase is defined in this Act as

“an agreement under which goods are let on hire and the hirer has the option to purchase them by the terms of the agreement and includes an agreement under which:

  • The owner gives a personal possession of the goods on the condition that the person pays the agreed-upon amount in periodic instalments.
  • The property in the goods will pass to such person upon payment of the last of the instalments, and such person will have the right to terminate the agreement at any time before the property passes.”

It allowed customers with a cash shortage to make an expensive purchase that they would otherwise have to postpone or forgo.

A hire-purchase contract, for example, allows a buyer who cannot afford to pay the asking price for an item of property in a lump sum but can afford to pay a percentage as a deposit to hire the goods for a monthly rent.

After settling in equal instalments, a sum equal to the original full price plus interest, the buyer has the option of purchasing the goods at a predetermined price (usually a nominal sum) or returning the goods to the owner.

These contracts most commonly get used for automobiles and high-value electrical goods, where the purchasers cannot pay for the goods directly.

EVOLUTION OF THE HIRE PURCHASE ACT

Hire purchase transactions began in England in the mid-nineteenth century, against the backdrop of the Industrial Revolution, when sewing machines were sold under a formal agreement to hire with the option to purchase. As a result, other consumer durable goods began to fall under the scope of such agreements.

The introduction of automobiles accelerated the spread of hire purchase transactions. Initially, such agreements had only two parties: the owner and the hirer. With the establishment of large-scale financing companies after World War I, the transactions took on a triangular shape.

Instead of dealing directly with the hirer, the new form became popular. The owner sold his goods to financing companies, renting them out to the hirers/intended under hire purchase agreements.

Hire purchase transactions got first introduced in India at the turn of the twentieth century. The Madras-based Auto Supply Company Ltd. (1920), later known as Commercial Credit Corporation, was the first hire purchase company. Other notable companies based in the north included the Motor and General Finance Company and the Instalment Supply Company (c. 1925).

Hire purchase agreements gained popularity in the postwar years, proving particularly useful in the road transport and automobile industries, namely financing commercial vehicles.

Several government-appointed committees, including the Masani and James Raj Committees, have acknowledged the role of hire purchase agreements in developing the road transport industry.

With the proliferation of hire purchase transactions, there has also been a fair amount of litigation. The courts have been active in elaborating on the various aspects and features of hire purchase agreements.

FEATURES OF HIRE PURCHASE ACT

Following are the features of a regular hire purchase transaction:

  • The person who has hired the goods will pay the owner of the goods regular instalments or rent, including some portion of the principal amount and some portion of the interest as agreed upon by both parties.
  • Only when the person has paid the final instalment of the goods that he or she has hired does ownership pass.
  • In the case of hire purchase, the person who has taken the goods on hire cannot transfer them to a third party because he/she does not own the goods.
  • Every instalment gets treated as a hire charge for the asset’s use.
  • If the hire vendor cannot collect the instalment payment, he or she has the right to repossess the asset.
  • If the hirer does not wish to possess the asset, he can return it at any time and not get forced to pay any subsequent instalments.

    However, after the hirer returns the assets, he is not entitled to any refunds because the payments cover the costs of hiring and using the assets.

ADVANTAGES OF HIRE PURCHASE ACT

The following are the benefits of the Hire Purchase system:

  • Because the customer must pay in instalments, he has profited. People with little income will benefit immensely from this method.
  • Hire purchase fosters prudence among customers who are required to save a portion of their income for instalment payments. It instils in people the habit of saving.
  • The buyer does not need to be concerned about the asset’s rapidly deteriorating value because there is no obligation to purchase the item in the event of a Higher Purchase.
  • Hirer and purchasers also benefit from a tax break on the interest they pay.

DIFFERENCE BETWEEN HIRE PURCHASE AND INSTALLMENT SYSTEM

HIRE PURCHASE

INSTALLMENT SYSTEM

Nature of Contract

Hire purchase is a contract for hiring goods. Purchase of goods through a system of regular payments until the full price gets paid.

It is a purchase agreement is a credit selling system in which a quantity of money or debt is paid regularly in instalments.

Ownership

After the final instalment gets paid, ownership of the goods gets transferred. The vendor retains ownership of the products until the whole purchase price gets paid.

The buyer acquires ownership of the items upon signing the agreement. After the initial instalment, ownership gets transferred instantly.

Right

The goods may not be sold, destroyed, or transferred by the buyer.

The buyer has the option to sell, destroy, mortgage, or transfer the property as he or she sees fit.

Risk

Before the final instalment gets paid, the vendor assumes all risks.

The buyer is responsible for all risks as of the date of the agreement.

Right of Return

The buyer has the option of returning the goods before making the final payment. Goods may get returned to the seller before the final payment.

The buyer is not permitted to return the goods to the seller.

Repair and Maintenance

The seller bears the responsibility for repair and maintenance as long as the buyer takes reasonable precautions.

Repair and maintenance are the buyer’s responsibility. Goods are not returnable.

Forfeiture of Installment Paid

If an instalment is not paid on time, the payment is forfeited and treated as hire charges.

The forfeiture act cannot get performed.

CONCLUSION

As previously said, we conclude that the hire purchase system is the ideal approach to rent products that are usually expensive to buy and subsequently own them if desired. Nevertheless, such agreements end up being more costly because interest gets added to the instalment amount.

FAQs

What are the provisions of the act?

  • The format/contents of the hire purchase agreement
  • Warrants and the conditions underlying the hire purchase agreement

What are the disadvantages of the Hire Purchase?

  • In the event of a hire purchase scheme, the total amount paid towards the item is more than the cash price of the asset.
  • Asset ownership only gets transferred after the hire purchase arrangement. Until then, the hirer is unable to sell or transfer the asset.

What does a case hirer need to do after deciding to terminate the agreement?

If the hirer wants to end the arrangement, he or she must either:

Return the item to prevent payment of the next instalment, then pay the future payments in full or at a discount as mutually agreed upon, and take possession of the asset.

What are the remedies in Case of Breach?

The owner has the right to terminate the hire purchase agreement if there is a breach:

  • physically repossess the things; or
  • to give up any claim to the items and file a lawsuit for damages.

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