PRESENTATION REPORT IN THE SUBJECT (COO3A3) OF FINANCIAL

SERVICES

TOPIC HIRE PURCHASE - MEANING, NATURE, MODUS OPERANDI

ROLL NO - 106-2015
CLASS - M.COM PART-II

POST GRADUATE
DEPARTMENT OF COMMERCE
ST.XAVIERS COLLEGE, MAPUSA
ACADEMIC YEAR 2016-2017

INDEX

SR.NO

1
2
3
4
5

CONTENT
Meaning of hire purchase
Definition of hire purchase

PG.NO

Nature & features of hire purchase

3-5
5-6
7

Modus operandi (process) of hire purchase

Bibliography

2
3

MEANING AND CONCEPT OF HIRE-PURCHASE SYSTEM

Hire-purchase system is a special system of purchase and sale of goods. Under this system
purchaser pays the price of the goods in instalments. The instalments may be annual, six
monthly, quarterly, monthly fortnightly etc. Under this system the goods are delivered to the
2

purchaser at the time of agreement before the payment of instalments but the title on the
goods is transferred after the payment of all instalments as per the hire-purchase agreement.
The special feature of a hire-purchase transaction is that the payment of every instalment is
treated as the payment of hire charges by the purchaser to the hire vendor till the payment of
the last instalment. After the payment of the last instalment, the amount of various
instalments paid is appropriated towards the payment of the price of the goods sold and the
ownership or the goods is transferred to the purchaser. Thus hire-purchase means a
transaction where the goods are sold by vendor to the purchaser under the following
conditions:

The goods will be delivered to the purchaser at the time of agreement.

The purchaser has a right to use the goods delivered.

The price of the goods will be paid in instalments.

Every instalment will be treated to be the hire charges of the goods which is being
used by the purchaser.

If all instalments are paid as per the terms of agreement, the title of the goods is
transferred by vendor to the purchaser.

If there is a default in the payment of any of the instalments, the vendor will take
away the goods from the possession of the purchaser without refunding him any amount
received earlier in the form of various instalments.

DEFINITION OF HIRE PURCHASE

The Hire Purchase Act 1972 defines a hire purchase agreement as, an agreement under which
goods are let on hire and under which the hirer has an option to purchase them in accordance
with the terms of agreement under which:

Payment is to be made in instalments over a specified period of time.

The possession is delivered to the purchaser at the time of entering into the contract.
The property in the goods passes to the purchaser on payment of the last instalment.
Each instalment is treated as hire charges so that if default is made in payment of any one

instalment, the seller is entitled to take away the goods.

The hirer is free to return the goods without being required to pay any further instalments
falling due after the return.

NATURE OF HIRE PURCHASE

3

Under the hire purchase system, the buyer agrees to pay for the commodity in installments.
On signing the agreement, the buyer can take possession of the commodity and use it. But the
ownership in the articles rests with the seller until the buyer pays the final installment. If the
buyer fails to pay any installment, the seller is entitled to take back the article and the buyer
will have no claim over the installments he has already paid. The amount paid will be treated
as hire charges for the article. Hence the sale becomes complete only when the buyer pays the
final installment. On payment of the final installment, the ownership of the article passes
from the seller to the buyer. Till then the agreement is one for hiring.
Section 3(1) provides that this Act applies to those hire purchase agreements under which the
hire purchase price does not exceed the sum of Eighty thousand shillings other than a hire
purchase agreement in which the hirer is a body corporate. This monetary limitation does not
apply so as to affect the definition of "hire purchase business"
Credit Sale is different from hire purchase agreement. Credit sale arises when there is an
agreement for the sale of goods on credit basis. In this case also, the purchase price may be
paid in future sometimes in four or five installments. In the case of credit sale goods become
the property of the buyer with the payment of the first installment. In case of failure to keep
up with installments, the seller cannot repossess product but may sue the buyer in Court for
unpaid amount. Sellers may at time request for post-dated cheques. This system is also
known as deferred payment system. A hire-purchase agreement to buy, but only an option is
given to the hirer to buy, while under credit sale there is an agreement to buy and no option to
return the goods.
FEATURES OF HIRE PURCHASE
1. Under hire purchase system, the buyer takes possession of goods immediately and agrees
to the total hire purchase price in instalments.
2. Each instalment is treated as hire charges.
3. The ownership of the goods passes from buyer to seller on the payment of the instalment.
4. In case the buyer makes any default in the payment of any instalment, the seller has right
to repossess the goods from the buyer and forfeit the amount already received treating it
as hire charge.
5. The hirer has the right to terminate the agreement any time before the property passes.
That is, he has the option to return the goods in which case he need not pay instalments

falling due thereafter. However, he cannot recover the sums already paid as such sums
legally represent hire charge on the goods in question.

MODUS OPERANDI OF HIRE PURCHASE (PROCESS)

The modus operandi of a hire purchase transaction is as follows:

The finance (hire purchase) company purchases the equipment from the supplier and

gives it on hire.
The hirer is required to make a down payment of 20-25% of the cost and pay the balance
amount along with the interest in EMI, in advance or arrears over a time span of 36-48

months
Alternately, instead of the down payment, the hirer has to deposit an equal amount as a
fixed deposit with the finance company which provides the entire finance on hire

purchase terms, repayable with interest in EMIs over 36-48 months.

Deposit and the accumulated interest is returned to the hirer upon payment of the last

instalment.
The interest on each hire purchase installment is computed on the basis of flat rate of
interest and the effective rate of interest is applied to the declining balance of the original
loan amount to determine the interest component of installment. For a given flat rate of
interest, the equivalent effective rate of interest is higher

HIRE PURCHASE: PROCEDURE FOR HIRE PURCHASE (WITH DIAGRAM)

Hire purchase involves a certain procedure, that is to say, modus operandi to be followed. For
this, an agreement called hire purchase agreement is made in written between the parties
involved in the hire purchase transaction.
The agreement contains the following:
The hire purchase price of the goods to which the agreement relates;
The cash price of the goods, that is to say, the price at which the good is purchased for
cash;
The date of the commencement of the agreement;
The number and time interval of installments by which the hire purchase price is to be
paid;
The name of goods, with its sufficient identity, to which the hire purchase agreement
relates to;
The amount to be paid, if any, at the time of signing the agreement;
The signatures of the parties involved in transaction.
5

If the hire purchase transaction is financed by the manufacturer or dealer, then two parties,
called, hire vendor and hire purchaser, are involved in the agreement. And if the hire purchase
transaction is financed by some financial institution, then there are three parties involved in
the transaction.
These are:
(i)
(ii)
(iii)

Hire Vendor,
Hire Purchaser, and
Financial Institution.

In such case, the vendor, firstly, receives the bills of exchange for hire purchase price of the
goods from the hirer. The vendor, then, discounts the bills with the financial institution and,
thus, gets payment for the goods sold under hire purchase system. The financial institution
collects the payments of the bills from the hirer, as and when the instalments fall due.
This entire process is depicted in the following Figure

Hire-purchase transaction benefits all parties involved in it. While it increases vendors sales,
it enables the hire purchaser to make use of costly machinery, equipments, etc., without
making full payment on the date of signing the agreement. After making the payment of the
last installment, the hire purchaser also acquires the ownership of the goods purchased under
hire-purchase system.
hirer's
obligations
The
hirer
usually
has
the
following
obligations:
the
owner
the
A
non-standard
compensate
way,
or
for
any
must
continue
in
asset
to
value)
pay
the
installments
and,
if
appropriate,
any
other
owner's
third
rights
party.
installments
owner
usually
or
breaches
has
the
right
any
to
of
terminate
other
the
terms
agreement
the
agreement.
the
This
hirer
entitles
defaults
the
inon
owner:
paying
the
nature
of
the
goods
and
the
percentage
of
the
total
price
paid)
Characteristics
of
Hire-Purchase
System:
characteristics
of
hire-purchase
system
are
as
under:
pay
the
hire
installments
commencement
take
reasonable
of
the
care
agreement.
of
the
goods
(if
the
hirer
damages
the
by
using
in
aof
To
inform
the
owner
where
the
goods
will
be
kept.
hirer.
hirer
can
sell
the
products
ifloss
an
only
if
he
has
purchased
finally
orthem
else
not
the
agreement.
goods
forfeit
from
the
deposit
possession
of
purchaser
without
refunding
him
any
amoun
retain
repossess
the
installments
the
goods
(which
already
may
paid
have
and
to
recover
be
by
application
the
balance
togoods
due
atime
Court
depending
toper
claim
damages
for
any
loss
suffered
Hire-purchase
price
under
is
hire-purchase
ahe
credit
purchase.
system
is
paid
in
installments.
goods
are
delivered
in
the
possession
of
the
purchaser
at
the
time
Hire
vendor
continues
to
be
the
owner
use
the
ofgoods
the
goods
as
ain
bailer.
till
the
payment
of
last
installment.
has
ashe
right
to
terminate
the
agreement
atwhere
any
in
the
capacity
of
ato
The
hire-purchase
becomes
owner
of
the
goods
after
the
payment
of
all
installments
as
If
there
is
athe
default
in
the
payment
of
any
installment,
the
hire
vendor
will
take
away
the

hirer's
obligations
hirer
usually
has
the
following
obligations:
non-standard
way,
or
must
continue
to
pay
the
installments
and,
iflast
appropriate,
compensate
for
any
in
asset
value)
any
other
third
party.
owner's
owner
usually
rights
has
the
right
to
terminate
the
agreement
the
hirer
defaults
inon
paying
installments
or
breaches
any
of
the
other
terms
agreement.
This
entitles
the
owner:
the
nature
of
the
goods
and
the
percentage
of
the
total
price
paid)
Characteristics
The
characteristics
of
Hire-Purchase
of
hire-purchase
System:
system
are
as
under:
commencement
pay
take
the
reasonable
hire
of
installments
the
care
agreement.
of
the
goods
(if
the
hirer
damages
the
by
using
in
aof
hirer.
A
To
hirer
inform
can
the
sell
owner
the
products
where
the
ifloss
an
goods
only
will
if
he
be
has
kept.
purchased
finally
orthem
else
not
to
forfeit
retain
the
the
installments
deposit
already
paid
and
recover
the
balance
due
repossess
the
goods
(which
may
have
to
be
by
application
togoods
atime
Court
depending
claim
damages
for
any
loss
suffered
Hire-purchase
is
ahe
credit
purchase.
price
goods
under
are
hire-purchase
delivered
in
system
is
possession
paid
in
installments.
ofthe
the
purchaser
at
the
time
Hire
vendor
continues
to
be
the
owner
ofgoods
the
goods
till
the
payment
of
installment.
has
ashe
right
to
use
terminate
the
the
agreement
as
ain
bailer.
atwhere
any
in
the
capacity
of
ato
The
hire-purchase
becomes
owne
BIBLOGRAPHY

Websites

financialaccountingcoach.blogspot.com/p/hire-purchase.html
www.yourarticlelibrary.com/finance/hire-purchase-procedure...hire-

purchase.../41000.
documents.mx Documents
www.advocatekhoj.com/.../hire/forms.php?...Hire%20Purchase...Forms%20of
%20Hir...

Book

Financial markets and services By Gordon, K. Natarajan