HIRE PURCHASE

Hire purchase (abbreviated HP) is the legal term for a contract, in this
persons usually agree to pay for goods in parts or a percentage at a
time. It was developed in the United Kingdom and can now found in
China, Japan, Malaysia, India, Australia, and New Zealand. It is also
called closed-end leasing. In cases where a buyer cannot afford to
pay the asked price for an item of property as a lump sum but can
afford to pay a percentage as a deposit, a hire-purchase contract
allows the buyer to hire the goods for a monthly rent. When a sum
equal to the original full price plus interest has been paid in equal
installments, the buyer may then exercise an option to buy the goods
at a predetermined price (usually a nominal sum) or return the goods
to the owner. In Canada and the United States, a hire purchase is
termed an installment plan; other analogous practices are described
as closed-end leasing or rent to own.

Hire purchase differs from a mortgage and similar forms of lien-

secured credit in that the so-called buyer who has the use of the
goods is not the legal owner during the term of the hire-purchase
contract. If the buyer defaults in paying the installments, the owner
may repossess the goods, a vendor protection not available with
unsecured-consumer-credit systems. HP is frequently advantageous
to consumers because it spreads the cost of expensive items over an
extended time period. Business consumers may find the different
balance sheet and taxation treatment of hire-purchased goods
beneficial to their taxable income. The need for HP is reduced when
consumers have collateral or other forms of credit readily available.

Standard provisions

To be valid, HP agreements must be in writing and signed by both

parties. They must clearly set out the following information in a print
that all can read without effort:

1. a clear description of the goods

2. the cash price for the goods
3. the HP price, i.e., the total sum that must be paid to hire and
then purchase the goods
 4. the deposit
5. the monthly installments (most states require that the applicable
interest rate is disclosed and regulate the rates and charges
that can be applied in HP transactions) and
6. a reasonably comprehensive statement of the parties' rights
(sometimes including the right to cancel the agreement during a
"cooling-off" period).
7. The right of the hirer to terminate the contract when he feels
like doing so with a valid reason.

The seller and the owner

If the seller has the resources and the legal right to sell the goods on
credit (which usually depends on a licensing system in most
countries), the seller and the owner will be the same person. But
most sellers prefer to receive a cash payment immediately. To
achieve this, the seller transfers ownership of the goods to a Finance
Company, usually at a discounted price, and it is this company that
hires and sells the goods to the buyer. This introduction of a third
party complicates the transaction. Suppose that the seller makes
false claims as to the quality and reliability of the goods that induce
the buyer to "buy". In a conventional contract of sale, the seller will be
liable to the buyer if these representations prove false. But, in this
instance, the seller who makes the representation is not the owner
who sells the goods to the buyer only after all the installments have
been paid. To combat this, some jurisdictions, including Ireland, make
the seller and the finance house jointly and severally liable to answer
for breaches of the purchase contract.

Implied warranties and conditions to protect the hirer

The extent to which buyers are protected varies from jurisdiction to

jurisdiction, but the following are usually present:

1. the hirer will be allowed to enjoy quiet possession of the goods,

i.e. no-one will interfere with the hirer's possession during the
term of this contract
2. the owner will be able to pass title to, or ownership of, the
goods when the contract requires it
 3. that the goods are of merchantable quality and fit for their
purpose, save that exclusion clauses may, to a greater or
lesser extent, limit the Finance Company's liability
4. where the goods are let by reference to a description or to a
sample, what is actually supplied must correspond with the
description and the sample.

The hirer's rights

The hirer usually has the following rights:

1. To buy the goods at any time by giving notice to the owner and
paying the balance of the HP price less a rebate (each
jurisdiction has a different formula for calculating the amount of
this rebate)
2. To return the goods to the owner — this is subject to the
payment of a penalty to reflect the owner's loss of profit but
subject to a maximum specified in each jurisdiction's law to
strike a balance between the need for the buyer to minimize
liability and the fact that the owner now has possession of an
obsolescent asset of reduced value
3. With the consent of the owner, to assign both the benefit and
the burden of the contract to a third person. The owner cannot
unreasonably refuse consent where the nominated third party
has good credit rating
4. Where the owner wrongfully repossesses the goods, either to
recover the goods plus damages for loss of quiet possession or
to damages representing the value of the goods lost.

Basically hirer have following rights- 1-Rights of protection 2-Rights of

notice 3-Rights of repossession 4-Rights of Statement 5-Rights of
excess amount

The hirer's obligations

The hirer usually has the following obligations:

1. to pay the hire installments

2. to take reasonable care of the goods (if the hirer damages the
goods by using them in a non-standard way, he or she must
 continue to pay the installments and, if appropriate,
compensate the owner for any loss in asset value)
3. to inform the owner where the goods will be kept.

The owner's rights

The owner usually has the right to terminate the agreement where the
hirer defaults in paying the installments or breaches any of the other
terms in the agreement. This entitles the owner:

1. to forfeit the deposit

2. to retain the installments already paid and recover the balance
due
3. to repossess the goods (which may have to be by application to
a Court depending on the nature of the goods and the
percentage of the total price paid)
4. to claim damages for any loss suffered.

HISTORY OF HIRE PURCHASE

Hire Purchase was was first used in the 19th Century as a means of
enabling carriers to purchase wagons for use in their business.
Basically, it means exactly what its name suggests; a hiring of the
goods until a certain condition is met, when they become the property
of the hirer. This condition is usually the completion of all of the
payments. The advantage to the finance company is obvious, the
property in the goods remains theirs until the goods are paid for.
Therefore the finance company has, at least a partial security for their
debt. In the 1950s and 1960s it acquired a bad reputation. This was
due to the way that some finance companies were dealing with their
customers. This lead to the first Hire Purchase Acts. These acts, in
the main, established two fundamental and far reaching legal
principals:

1/ One one third of the total amount payable has been paid, the
finance company cannot recover the goods without the hirers
consent. Unless the finance company first obtains a Court Order.
2/ If an innocent "private buyer in good faith" purchases the goods
from the hirer, the finance company cannot take those goods from the
innocent purchaser. That is, the finance companies property in those
goods is lost. To meet those conditions the innocent buyer must

A/ Be a genuine private buyer, that is not be engaged in any way in

the motor trade.

B/ Be ignorant of the fact that the person from whom the goods was
purchased was hiring them under a Hire Purchase agreement.

These principals have remained intact up to the present day. In the

early 1970s the Hire Purchase Acts and Money Lenders Acts where
replaced by new piece of legislation, The Consumer Credit Act 1974.
The essential parts of the old Hire Purchase Acts remained intact,
however there was now a requirement for businesses engaged in the
offering of credit to be licenced.

In later years, civil procedures have been the subject of two judicial
reviews, the first instigated by the then Lord Chancellor, the other
(recent) following a report by Lord Woolfe. Although neither of these
has lead to any legislative changes, radical changes have been made
to the County Court system. The result of all this is that the system is
now much faster, slicker, and easier to use. Under the present
system, anyone running a finance company, would do well to
consider undertaking their own legal work.

Hire Purchase Agreements - Pros & Cons

Is it Better for a Consumer to Buy on Credit or Pay in Cash?

Consumers take out hire purchase agreements to buy cars and white
goods, such as washing machines, cookers and computers. Is it
better to buy on credit or pay in cash?

A hire purchase agreement is a conditional sale and legitimate title

doesn't change hands until the final monthly repayment has been
paid. The consumer has possession of the goods, but they cannot be
sold until the item has been fully paid-off. Hire purchase (better
known as HP) is regularly offered by merchants to enable consumers
to buy cars and a variety of white goods, including dish washers,
laptop computers and fridge freezers. Whilst some merchants offer
interest-free credit, others charge a high interest rate when a
consumer has a bad credit rating.

The Advantages of Hire Purchase Agreements

• Spread the cost of finance. Whilst choosing to pay in cash is

preferable, this might not be possible for consumer on a tight
budget. A hire purchase agreement allows a consumer to make
monthly repayments over a pre-specified period of time;
• Interest-free credit. Some merchants offer customers the
opportunity to pay for goods and services on interest-free
credit. This is particularly common when making a new car
purchase or on white goods during an economic downturn;
• Higher acceptance rates. The rate of acceptance on hire
purchase agreements is higher than other forms of unsecured
borrowing because the lenders have collateral;
• Sales. A hire purchase agreement allows a consumer to
purchase sale items when they aren't in a position to pay in
cash. The discounts secured will save many families money;
• Debt solutions. Consumers that buy on credit can pursue a debt
solution, such as a debt management plan, should they
experience money problems further down the line.

The Disadvantages of Hire Purchase Agreements

• Personal debt. A hire purchase agreement is yet another form

of personal debt. it is monthly repayment commitment that
needs to be paid each month;
• Final payment. A consumer doesn't have legitimate title to the
goods until the final monthly repayment has been made;
• Bad credit. All hire purchase agreements will involve a credit
check. Consumers that have a bad credit rating will either be
turned down or will be asked to pay a high interest rate;
 • Creditor harassment. Opting to buy on credit can create money
problems should a family experience a change of personal
circumstances;
• Repossession rights. A seller is entitled to 'snatch back' any
goods when less than a third of the amount has been paid
back. Should more than a third of the amount have been paid
back, the seller will need a court order or for the buyer to return
the item voluntarily.

Subject to a credit check, hire purchase agreements are an excellent

way for consumers to buy on credit and spread the cost via a series
of affordable monthly repayments. Whilst being in a position to pay in
cash is preferable, interest-free credit can be a better option. Always
remember that this is a form of personal debt and consumers should
be careful not to over-extend themselves financially.

hire-purchase

Definition

Sales promotion device that creates customers' purchasing power in

the form of a fixed cost, fixed period installment loan, secured by a
lien on the purchased item as the collateral. In case of capital
equipment, the customer repays the loan from the earnings
generated by the purchased asset (which otherwise would have
remained unsold due to the customers' lack of cash). During the
repayment period the buyer has the possession and use but not the
ownership (title) to the item. Only upon the full payment of the loan,
the title passes to the buyer. Also called installment buying, it is a
social innovation that expands the economy with additional income.
Cyrus McCormack (1809-84, one of the inventors of the harvesting
machine) pioneered it in the early 19th century US, and Issac Singer
(1811-75, one of the inventors of the sewing machine) made it a
common practice.
HP AGREEMENT

Hire purchase is an agreement whereby a person hires goods for a

period of time by paying instalments, and can own the goods at the
end of the agreement if all instalments are paid.

Hire purchase agreements usually last between two and five years,
the most common last three years. Under a hire purchase agreement,
the consumer does not actually own the goods until the last
installment is paid, although he or she has full use of the goods
throughout the repayment period.

Hire purchase agreements can be held with banks, building societies,

finance companies and certain retail stores, for example, garages.
The store or garage is not actually providing the loan. It is acting as
an agent for a finance company and earns commission from the
finance company for arranging the loan.

It is advisable to read a hire purchase contract very carefully before

committing yourself to any agreement.

How does a hire purchase agreement work?

A hire purchase agreement is drawn up and signed by the hirer (the

consumer) and on behalf of the owner (the lending institution). If there
is a retailer involved, e.g., a garage, it also signs the agreement and
supplies the goods in question.

Most of the car loans offered by garages are hire purchase loans.
Consumers can also be offered hire purchase loans when buying
furniture, computer equipment or electrical goods.

The hire purchase agreement states:

• The goods the agreement refers to, for example, a car or

computer.
• The cash price of the goods
• The hire purchase price, which is the total sum payable over
the life of the loan in order to complete the purchase of the
goods. The hire purchase price is therefore the monthly
 payment or installment multiplied by the number of installments
which have to be made.
• The amount of each installment by which the hire purchase
price is to be paid. Sometimes the last installment required to
end the agreement is much larger than all the others. This is
called a "balloon" payment and will have to be paid to clear the
loan and allow the consumer to become the owner.
• The date each instalment is to be paid
• The number of installments
• The names and addresses of all the parties to the agreement
• A statement that the hirer has the right to withdraw from the
agreement within 10 days of receiving a copy of the agreement.
This is known as a 'cooling off' period. Often consumers are
asked to give away this right by signing a waiver. You do not
have to sign this waiver in order for your application to be
processed. Consumers should try to take some time to read all
the terms of the agreement and to ensure they understand
these fully before signing this or any other part of the
agreement.
• A statement that the hirer (consumer) must inform the owner
(finance house) as to the whereabouts of the goods to which
the agreement relates
• The words "Hire Purchase Agreement" must be stated clearly
and in a prominent position on the agreement form.
• The agreement must also set out the fees and penalties that
apply. Some examples of these costs are provided below.

Unless all of these requirements are contained in the agreement, the

agreement itself may not be enforceable.

Can a consumer terminate a hire purchase agreement?

A consumer (the hirer) can terminate the agreement at any time by

giving notice in writing to the owner of the goods (the finance house).
Consumers should be aware that breaking a hire purchase contract
before its normal end date usually involves penalties. The consumer
can either:

• pay half the amount of the total hire purchase price (if the total
of instalments already paid have not reached that amount) and
 return the goods to the owner. If the goods in question are
damaged in any way, the consumer will be liable to pay for any
damage caused. The finance house may issue a notice of
costs, but consumers should try to get their own estimate in
such cases.
• buy the goods earlier than planned. The consumer can own the
goods by paying the difference between the amount already
paid and the total hire purchase price. In such cases, there is
usually a reduction on the overall amount due as the loan is
being paid off earlier than planned. This reduction is calculated
using a recognised formula for early loan repayments, however,
the amount of any reduction is relatively small.

Can the owner (finance house) repossess the goods?

The finance house can only repossess the goods under certain
circumstances. If the consumer has not yet paid off one-third of the
total hire purchase cost, the owner can repossess the goods at any
time without taking legal action against the consumer.

However, if the consumer has paid one-third or more off the total hire
purchase cost, the owner cannot repossess the goods without taking
legal proceedings. Any deposit that is paid at the start of the
agreement or the value of any trade-in for example, is taken into
account in calculating one third of the cost.

If this "one-third" rule is breached by the owner, the consumer is

entitled to end the agreement and can seek a refund of all payments
made.

What happens if the goods are faulty or damaged?

Anything you buy under a hire purchase agreement must comply with
the Sale of Goods and Supply of Services Act, 1980 and be:

• of merchantable quality
• fit for its normal purpose, and reasonably durable
• as described, whether the description is part of the advertising
or wrapping, on a label or something said by the salesperson.
If goods hired under a hire purchase agreement are or become faulty,
both the retailer and the owner (finance company) are responsible. A
consumer can claim against either party in this situation. A claim
cannot be made against the manufacturer of the goods.

If a consumer returns defective goods, he or she is entitled to a

refund of any installments paid as consumer rights in this situation
are the same as if the goods were purchased outright.

A guarantee under a hire purchase agreement applies in the same

way as if goods were bought outright. The manufacturer makes the
guarantee. If there is a fault with the goods, the consumer can
choose to have the goods repaired under the guarantee or to seek a
full refund or exchange from the owner.

Under a hire purchase plan the consumer has a duty to take

reasonable care of the hired goods. If the goods are damaged by the
consumer and returned to the owner or finance company they are
entitled to send a bill for repairs to the consumer.

What does a hire purchase agreement contain?

You must be given a copy of the hire-purchase agreement, in writing,

within 10 days of the
agreement being made. The words ‘Hire-purchase agreement’ must
be clearly written on the document, and the agreement itself must
include the following information:

• A description of the car the agreement refers to

• The cash price of the car (the cost if you paid in full with cash)
• The number of instalments you have to pay, when you have to
pay them (for example, every week or every month) and the
amount of each instalment
• The hire-purchase price (the total of all instalments, any deposit
you pay, plus fees) that you must pay to own the car
• Details of your rights to end the agreement early
• Information about the ‘cooling-off’ period (the time in which you
can change your mind and decide not to go through with the
agreement)
• A statement saying that you must let the owner know where the
car is normally kept
• Information on the costs and penalties you will have to pay if
you do not stick to the terms of the agreement
• Details of the restrictions on the owner, if they are repossessing
the car
• Information about the ‘half rule’ and the ‘one third’ rule.