HIRE PURCHASE FINANCE

According to Hire Purchase Act 1972, the term ‘Hire Purchase’ means 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 the agreement, and includes an agreement under which:

1. Possession of the goods is delivered by the owner thereof to a person on the condition that such person pays the agreed amount in periodic payments
2. The property of the goods is to pass to such a person on the payment of the last of such installment
3. Such a person has a right to terminate the agreement at any time before the property so passes

Hire purchase is a transaction of finance whereby goods are bought and sold as per certain terms and conditions. The various terms and conditions of hire purchase finance are:
1. Payment of periodic installments

2. Immediate possession of goods by the buyer

3. Ownership of good remaining with the vendor until the payment of the last installment

4. Vendor’s right to repossess the goods in the event of default committed by the buyer

5. Treatment of each installment as hire charges till the payment of last installment

Difference between Leasing and Hire Purchase

1. Ownership: In Leasing it lies with the finance company, the lessor and it is usually never transferred to the lessee, the user. But in HP financing the property of the goods is transferred to the hirer on the payment of last installment
2. Depreciation: Lessor and not the Lessee is entitled to claim depreciation tax shield in the Leasing. But in HP financing the Hirer (owner) is entitled to claim depreciation tax shield.
3. Capitalization: Capitalization of the asset is done in the books of the Lessor, the leasing company. But in HP it is done in the books of the Hirer.
4. Payments: The entire lease payments are eligible for tax computation in the books of the lessee. But in case of HP only the hire-interest is eligible for tax computation in the books of the hirer.
5. Salvage Value: The lessor and the Lessee have the right to claim the benefit of salvage value. But in HP only the hirer can claim the benefit of salvage value as the prospective owner of the asset.
6. Down payment: No Down payment is required for acquiring the use of leased assets. Down payment is required to be made for acquiring the asset in case of HP.
7. Maintenance of asset: Where the lessee has to maintain the leased asset in case of financial lease, upkeep is the responsibility of the lessor in case of operating lease. But in HP it is the hirer’s responsibility to ensure the maintenance of the asset bought.
8. Nature of the asset: An asset given on lease by a leasing company is considered as the fixed asset of the lessor. But in HP the hire-vendor normally shows the asset let under HP as stock in trade or as receivables.
9. Receipts: All receipts from the lessee are taken into the lessor’s profit and loss account. Only the interest portion is taken into hire-vendor’s profit and loss account in case of HP.
10. Reporting: In case of leasing leased assets are disclosed by way of note forming parts of accounts. But in HP the asset bought under HP will be shown as asset and the amount of installments payable to the lessor as liability.