Hire Purchase System

Hire Purchase System

The Hire-purchase system is a special system of purchase and sale of goods. It is a system of payment for a commodity in regular installments while using it. It refers to a system of purchase in which the purchase price is paid by periodical installments. It is a method of financing the fixed asset to be purchased on a future date. Under this system, the purchaser pays the price of the goods in installments. The installments may be annual, six-monthly, quarterly, monthly fortnightly, etc. Under this method of financing, the purchase price is paid in installments. All money being paid till the final installment is regarded as payment for hire. The goods become the property of the buyer only when all the installments are paid. Ownership of the asset is transferred after the payment of the last installment.

In a hire purchase agreement, ownership is not transferred to the purchaser until all payments are made. The special feature of a hire-purchase transaction is that the payment of every installment is treated as the payment of hire charges by the purchaser to the hire vendor until the payment of the last installment. It usually proves to be more expensive in the long run than purchasing an item outright.

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 the agreement.
  • the purchaser has a right to use the goods delivered.
  • the price of the goods will be paid in installments.
  • every installment will be treated to be the hire charges of the goods which are being used by the purchaser.
  • if all installments are paid as per the terms of the agreement , the title of the goods is transferred by a vendor to the purchaser.

Characteristics of Hire-Purchase System

  • Hire-purchase is a credit purchase.
  • The price under the hire-purchase system is paid in installments.
  • Hire vendor continues to be the owner of the goods till the payment of the last installment.
  • The hire-purchaser has a right to use the goods as a bailer.
  • The hire-purchaser has a right to terminate the agreement at any time in the capacity of a hirer.

Advantages 

  • Financing of an asset through hire purchase is very easy.
  • The hire purchaser becomes the owner of the asset in the future.
  • Hire purchaser gets the benefit of depreciation on asset hired by him/her.
  • Hire purchasers also enjoy the tax benefit on the interest payable by them.

Disadvantages

  • Ownership of assets is transferred only after the payment of the last installment.
  • The magnitude of funds involved in hire purchase is very small and only small types of assets like office equipment, automobiles, etc., are purchased through it.
  • The cost of financing through hire purchase is very high.