Hire purchase is a mode of financing where goods are sold on a future date with the purchase price paid through installments. The goods are leased to the hirer, who has the option to purchase them by paying all installments. Key features include payment in installments over a set period, possession delivered at contract but ownership passes on final payment, and the seller can take back goods if installments are defaulted on. The finance company purchases goods and leases them to the hirer in exchange for a down payment and monthly installments covering principal and interest. Hire purchase differs from installment sales in that the hirer can terminate before final payment, while ownership transfers with first payment in installment sales.

1. Hire Purchase

2. Conceptual Framework
• Hire Purchase is a mode of financing the price
of the goods to be sold on a future date.
• The goods are let on hire, the purchase price
is to be paid in instalments and the hirer is
allowed an option to purchase the goods by
paying all the instalments.

3. Features
• Payment to be made in instalments over a specified period.
• The possession is delivered to the hirer at the time of entering into the
contract.
• The property in the goods passes to the hirer on payment of the last
instalment.
• Each instalment is treated as hire charges so that if default is made in
payment of any instalment, the seller becomes entitled to take away the
goods.
• The hirer/purchaser is free to return the goods without being required to
pay any further instalments falling due after the return.

4. Modus Operandi
• The finance (hire purchase) company
purchases the equipment from the equipment
supplier and lets it on hire to the hirer to use
it, who is reqired to make a down payment of
say 20-25 per cent of the cost and pay balance
with interest in Equated Monthly instalments.

5. • The interest component of each hire purchase
instalment is computed on the basis of a flat
rate of interest on a declining balance method
method.

6. Hire Purchase Vs Instalment
• In Instalment sale, the contract of sale is
entered into, the goods are delivered and the
ownership is transferred to the buyer, but the
price of the goods is paid in specified
instalments over a definite period.

7. • In hire purchase, there is a call option to
purchase the goods and the hirer has the right
to terminate the agreement at any time
before the payment of the last instalment.
• Whereas in Instalment sale, the ownership is
transferred simultaneously with the payment
of the first/ initial instalment.

8. Lease Versus Hire Purchase
• In lease the ownership remains with the
lessor, while in hire purchase, it is transferred
on payment of the last instalment.
• The hirer is entitled to claim depreciation.
• Lease is usually for goods where the funds
required is very large like aircrafts, ships etc.

9. Legal Framework
• Sale of Goods Act
• Indian Contract Act

10. Modalities
• The dealer contracts a finance company.
• The customer selects the goods and expresses his
desire to acquire them on hire purchase.
• The dealer arranges for the full set of documents.
• The documents are generally printed by the finance
company.
• The dealer sends the documents to the finance
company.

11. • The finance company, if it decides to accept the transaction,
signs the agreement and sends a copy to the hirer along with
the instructions for payment of the instalments.
• The dealer delivers the goods to the hirer against
acknowledgement and the property in the goods passes to
the finance company.
• The hirer makes the payment of hire instalment periodically.
• On completion of the hire term, the hirer pays the last
instalment and the property in the goods passes to him on
issue of a completion Certificate by the Finance Company.

12. Taxation
• Though the hire purchaser is not the owner of
the asset, he is entitled to claim depreciation
as a deduction, on the entire purchase price.
• The consideration for hire received by the hire
vendor, is liable to tax, under the head profits
and gains of business and profession. The hire
income from house property is generally
taxed as income from House property.

13. • The tax treatment given to hire purchase is
exactly the opposite of that given to lease
financing.

14. • Accounting

15. In the books of the Purchaser
• The purchase price is capitalized and the cash
purchase less down payment is booked as a
laibility.
• Depreciation is booked on the Asset
• The charge is divided into a Finance charge
and a capital recovery charge.

16. In the books of the Hire Vendor
• The instalments receivables is recorded as a current asset.
• The finance income component is recorded as a current
liability under the head Unmatched Finance Charges.
• The instalment received reduces the value of the current
asset.
• Its interest component is recorded as Hire Finance Income.
• The capital recovery component goes towards reducing the
current liability - Unmatched Finance Charges.

17. Questions for Revision
• What is a Hire Purchase ? How does it take
place ?
• Examine Leasing versus Hire Purchase as
methods of Asset Financing ?