Hire Purchase System: Ease of availing extravagant goods

A Hire-Purchase is a system of arrangement made between two parties(i.e. seller and buyer). It involves buying some assets in which the buyer makes the payment to the seller in instalments. Thus the buyer gets possession of the asset. But the ownership of the goods remains with the seller until the final instalment payment.

The amount paid by the buyer to the seller is under an agreement between both the parties for paying in instalments with the interest rate levied on it.

If the buyer cannot make the full payment or commits default in making the instalments, the seller owns the right to regain possession of the assets.

In this system, the buyer is the hirer, hiring the goods from the seller against a promise of purchasing the goods upon making the full payment.

Features of the hire purchase system

There are some significant features of the hire purchase system:-

  • A hire-purchase agreement is governed by the hire-purchase act 1972.
  • It is another form of credit sale in which the amount gets recovered from the consumer at a future date.
  • The price of the goods, assets or any form of property is paid in instalments upon a fixed interest rate.
  • The instalment amount includes the principal amount and interest rate levied on it.
  • The buyer gains possession of goods by making the first agreed down payment against the assets.
  • The assets’ ownership gets transferred to the buyer upon the payment of the last instalment.
  • In the event of default in payment of instalments by the buyer or hirer, the seller can repossess the goods or assets.
  • The amount of payment made up to the default period is forfeited and considered as hire charges.
  • The buyer of the assets or goods cannot damage, sell, transfer, hire out, pledge the goods between the hire period.
  • The buyer can return the goods anytime without making further payments.

Types of Hire-Purchase

In a hire purchase system are two types of hire-purchase mentioned below:-

  • Firstly, the financer or creditor purchases the goods on behalf of the customer directly from the seller and executes a hire-purchase agreement with the customer.

    When the customer makes the payment of all the instalments to purchase the goods under the agreement, the customer gets designated as the goods’ owner.

    The finance pays the amount of consideration against the goods to the seller and recovers the amount from the buyer (i.e. customer) under a specific interest rate.

  • Secondly, the customer executes a hire-purchase agreement directly with the seller. The seller keeps goods possession until the hirer or buyer makes the full payment of all the instalments along with the interest rate.

Under the hire-purchase agreement, in both cases, on account of default in payment, the financer or the seller both have the right to forfeit the financed goods or assets.

Advantages and disadvantages of hire purchase system

Hire purchase system has both advantages and disadvantages, which are:

Advantages of hire purchase system

  • A hire purchase agreement allows a person to afford an asset of a more excellent value in the easiest possible way.
  • A hire purchase system offers greater flexibility in making the payment per an individual’s comfort. An individual can pay a greater amount of down payment for less instalment period or less interest amount or can make less down payment and increase the instalment period as per his comfort.
  • The interest rate offered will remain fixed throughout the instalment period and will not depend on any external factor or market conditions or decision by the financier or bank.
  • After the full payment, the buyer transfers the asset ownership to relieve him of any further liabilities while using the asset.
  • The hire purchase agreements allow an individual to make early payments to reduce long term liability and interest rate.

Disadvantages of hire purchase system

  • In a hire purchase system, the title over the goods is not passed to the hirer or purchaser until full payment. So, the purchaser cannot even sell, pledge, etc., the goods or assets for his benefits for which he is making the payments.
  • The overall selling price will be higher than the actual cost of the goods or assets because of the interest rate. These interest rates are fixed, but the interest charges will be high if the instalment period is high.
  • Hire purchase agreements are available to buyers with poor credit scores. The buyers with a poor credit score or no credit score may not be eligible for deals with lower interest rates.
  • In a short-term agreement under hire purchase system, the higher interest rate makes it an unfair deal.
  • The default in payment will reflect in the individual’s credit profile, ultimately reducing the individual’s credit score. These poor reviews by the financier will affect the credit profile, creating issues to avail loans in the future.

Instalment Purchase System

An instalment purchase system is also an arrangement for paying the amount on goods in instalments by the seller to the buyer. The way of making the payment is the same as the Hire-Purchase system, but the main difference is that title on the goods gets transferred simultaneously with the possession of the goods.

The buyer becomes the owner of goods from the time he obtains its possession transferred to him by the seller on entering into a contract.

If the buyer defaults in making the payment, the seller cannot get the repossession of the goods.

The seller has the right to enforce the contract made between them in the court of law for recovery of the amount due on the buyer’s part against the seller.

The sale of goods act 1930 governs the instalment purchase system in India

Features of Instalment system

There are certain features of the instalment system:-

  • An instalment purchase system is the same as a credit purchase.
  • The buyer makes the payment for a certain amount of money, also known as a down payment to the seller to enter into a contract to purchase goods with them.
  • The seller enters into a contract of sale with the buyer against the consideration amount to be paid in instalment over a period of time.
  • The buyer obtains the possession and title over the goods soon after entering into a contract.
  • In the event of a default, the seller cannot obtain repossession of the goods.
  • Unlike the hire-purchase system, the seller cannot even forfeit the already paid instalment amount.
  • The seller can seek the remedy from the court of law by enforcing the contract to recover the due amount.
  • The contract of the goods’ purchase incorporates the instalment period, the amount of instalment, and the interest.
  • In this system, the buyer gets authorised to sell, pledge, destroy the goods. He is also authorised to use the goods as per his will for clearing the instalments.


The Hire Purchase system and the instalment purchase system are the most prevalent these days for purchasing expensive goods and assets out of budget.

In comparison, the latter is better than the former for purchasing. The title of goods gets transferred simultaneously with goods possession to the buyer to meet his future needs and authorises him to settle the dues on default.

A con of the hire-purchase system is that on account of default in payment, the previously paid instalments will get forfeited, and goods will be taken back, which also seems unfair at some point.

Overall, both purchase systems support the concept of “ease of doing business” for business houses. They also provide the consumers with an option to purchase the goods of their own choice by choosing the instalment period as per their will.


Which legislation governs the hire purchase system in India?

The hire-purchase act 1972

Which legislation governs the instalment purchase system in India?

The sale of goods act 1930.

The depreciation on the assets purchased through the hire-purchase system is based on?

The cost price of the asset

What is the Hire-Purchase price?

It is the total amount of money required to complete the purchase of the goods, including the amount paid as a down payment or initial payment in a hire-purchase agreement. It does not include penalty, compensation or damages for breach, or any other amount.

About Author

Ayush Ranjan Jha is a 4th-year law student of Vivekananda Institute of Professional Studies (VIPS), IP University, Delhi.

He is inquisitive towards Corporate law, International law & Constitutional law.

He is very keen on research work and got published a number of Research papers and articles related to legal topics during his previous academic years.

Currently, he is preparing for Judicial services examinations.