Hire Purchase Agreement relates to the class of agreement where the owner of the goods allows a person (the hirer) to hire the goods in exchange for monthly instalment payment. The Hire Purchase Agreement includes a provision for purchasing expensive consumer goods such as automobiles, televisions, heavy machinery, and so on.
The hire-purchaser could purchase goods by making an initial down payment and paying the remainder in instalments. After the final instalment payment, the hirer becomes the item’s owner.
Such Hire Purchase Agreement found extensive usage to finance many industries’, especially heavy machinery. Hence, to summarise, buyers use the Hire Purchase Agreement in situations where they cannot afford to pay for the item in one lump sum but can afford it in instalments at regular intervals.
Further, it must be noted that the hire purchase agreement differs from a contract of sale, but rather a bailment agreement in which the hire-purchaser has the right to use but not own the goods until such hire purchase agreement expires the full payment is made for the good.
Contents of the Hire Purchase Agreement
The following are the contents of a Hire Purchase Agreement, according to Section 4 of the Hire Purchase Act:
- The hire-purchase price of the goods covered by this agreement
- The price at which the hire-purchaser can purchase the goods in cash.
- The start date of the contract.
- The number of instalments, the amount to be paid on each instalment, the date, and the method of determining the date, place, and to whom the amount is to be paid are all specified.
- The goods covered by this agreement and the method for identifying them
- The payment method, whether the lump sum amount is to be paid in cash or by check, is the payment method. If a portion of the payment must be made in cash or by check, the hire purchase agreement must state this.
Types of Hire-Purchase Agreement
There are two types of Hire Purchase Agreement:
- The first type of agreement involves a third entity known as the financier, who purchases the goods from the seller on the hirer’s behalf and transfers them to the hirer upon payment of the final instalment.
In this case, the financier owns the goods, pays the purchase price to the seller, and can recover it from the hire-purchaser.
In this case, the financer has the right to seize the goods if payment is not made.
Currently, hire-purchase agreements in India are triangular, with the seller, financier, and hire-purchaser all participating. Most sellers work with finance companies to arrange a hire-purchase with the hire-purchaser.
- In the second type of agreement, the hire-purchaser agrees with the seller, pays the purchase price, and becomes the owner of the goods upon payment of the final instalment.
In this case, the seller has the right to seize the goods if payment is not made.
Working of the Hire-Purchase Agreement
In the case of hire purchase, the purchaser must make a down payment rather than the entire selling price of the asset, as the remaining amount after paying the down payment in instalments with interest.
Both parties mutually agree on the terms and conditions of the repayment period and the percentage of interest when they enter into a hire purchase agreement.
The buyer of an asset has the right to use the asset immediately after making the initial down payment, but ownership is not transferred until any outstanding instalments are paid.
We can say that a hire purchase agreement is similar to a rent-to-own transaction in which the lessee has the option to purchase the asset at any time during the lease agreement’s term. And, because ownership is not transferred until the last instalment is paid, the vendor has more protection as the asset can get repossessed if the instalment amount is not paid on time.
Advantages of a Hire Purchase Agreement
- Making payments for the goods is convenient. On payment of instalments, the hire-purchaser can become the owner of the goods.
- This type of transaction benefits the seller because it increases the sales volume and the profit from the sales.
- The amount received by the seller from the instalments incorporates the original price and interest, and the interest gets calculated in advance and added to the hirer’s instalment price.
- In the instance of a default in payment by the hire-purchaser, the goods must get returned to him.
Disadvantages of a Hire Purchase Agreement
- When purchasing the product outright, the hirer must pay a higher price for the asset, and the interest rate is built into the cost price.
- Most hire-purchase agreements are typically lengthy and stringent.
- In the instance of a default, the seller repossesses the goods.
- The hire-purchase agreement inflates the asset’s demand. The hire-purchaser gets enticed to buy the goods even though he cannot afford to do so.
- Under this system, the seller is also at risk, even though he has the right to reclaim the goods on fail to make the payment on time. Secondhand items command a low price and a small number of buyers.
Termination of Hire Purchase Agreement
- Such Hire Purchase Agreement could get terminated per its terms. Typically, the agreement specifies the circumstances under which the agreement will get terminated.
- It is either through the goods’ return or through notice of termination. It is done either by the seller in the event of a breach on the part of the hire-purchaser or by the hire-purchaser.
- The agreement can get terminated through performance, which occurs when the hire-purchaser purchases the goods from the seller after paying all instalments.
- The agreement also gets terminated when the parties agree to renew it or enter into a new agreement by terminating the existing one.
Registration of Hire Purchase Agreement
Section 5 of the Stamp Duty Act requires the payment of stamp duty to register the hire purchase agreement. In India, each state levies a different stamp duty, and the hire Purchase Agreement, on the other hand, is not required to be registered.
In the end, it could be concluded that the hire-purchase system is the best way to hire goods, generally expensive to buy and later own them if desired. However, such Hire Purchase Agreement is more costly because interest is added to the instalment amount.
FAQs on Hire Purchase Agreement
What are the hire purchase rules?
All the involved parties in the agreement must sign the hire-purchase agreement in writing. The Act's purpose is to protect consumers, and this Act does not apply to all items and goods covered by the hire purchase law.
What happens on failing to pay to hire purchase?
If one fails to make payments on an HP agreement, the creditor will contact the defaulter. The creditor will issue a default notice if the defaulter does not repay the arrears within three months. They could take action to repossess the goods after issuing the default notice.
What are the tax consequences of hire-purchase?
In the case of hire-purchase transactions, the hire-vendor pays tax on the income inherent in the hire instalments rather than on the entire hire rental. As a result, the tax only gets levied on the income, not the inflow.
Is GST levied on hire purchase?
The goods’ ownership passes to the buyer upon payment of the final instalment in a hire purchase transaction. As a result, GST is applicable on hire purchase transactions because they are covered by entry 1 (c) of Schedule II of the CGST Act.