Knowing more about Hire Purchase System

A Hire Purchase System is a system in which the hirer purchases goods from the vendor but does not pay him in full. Instead, he makes a lump sum payment known as a down payment, and the remainder is paid in instalments by the purchaser of the goods.  It is similar to an instalment system, but the basic difference between an instalment system and a hire purchase system is the time to transfer the ownership.

 Parties involved in the hire purchase systems are Hirer: A “Hirer” is a purchaser of a good or an individual who acquires a good or service from the proprietor or vendor under the recruit buy framework.

Hire Purchase Meaning: Characteristics of Hire Purchase System

The Hire Purchase System offers a wide range of leverage to the hirer as it offers a chance to pay half of the amount in instalments. Some of the major features of the same are discussed below:

1. Regulations: Compliant with the Employment Purchase Act of 1972. 
2. Parties: The leasing of resources is an agreement between residents and managers. 
3.  Exercise of Rights: If the resident fails to pay, the property owner may use or request the return of the property, not the remaining parts. 
4.  Right to sell: Tenants may not sell or mortgage investment property until the property has been transferred. 
5. Failure: Hire Vendor is solely responsible for any loss until the ownership gets transferred to the hirer of the good.

Hire Purchase Meaning: Hire Purchase Varieties

• Purchase of Consumer Hire: The buyer, in this case, hires the goods for non-business purposes, i.e. for personal use. Aside from business, this could also be for family or other domestic purposes. The natural person, not the business, is the hirer in this situation.
• In contrast to the preceding example, the hirer, in this case, is a firm or industry that takes things on hire for business purposes. Consider the hire purchase of industrial machinery as an example.

Hire Purchase Meaning: Hire Purchase Agreements Have Several Advantages

Hire purchase agreements may be used by businesses with limited working capital to deploy assets. As the payments are recorded in expenses, they may be more tax-efficient than that of standard loans in which any depreciation tax benefits will offset the savings.

Hire purchase agreements can be used to secure lines of credit for enterprises that are necessary for expensive machinery, building, manufacturing, plants, printing,  transport, and engineering, as well as startups with collateral.

A hire purchase agreement can increase a company’s return on capital employed (ROCE) and direct return on assets (ROA). This is because the firm does not require as much debt to buy assets.

Difference between Hire Purchase and Lease 

Hire Purchase is a contract signed between the hire vendor who exchanges an asset for payment made to the hire purchaser. The consideration takes a Hire Purchase Price that includes both the security deposit and monthly payments as interest charges are included in the hire buy pricing, which is frequently more than the product’s cash price. The hirer pays the instalment at regular intervals for a defined period. The payment consists of financing charges (interest) and capital payments.

Leasing is a contract in which one party allows another party to use an asset for a given period in exchange for periodic payments for a specified time. Accounting standard – 19 deals with leases and applies to all businesses, considering several exceptions.

The basic differences between Hire Purchase and Lease are listed below:

• The duration for leasing is longer as compared to hire purchasing.
• A down payment is necessary for hire purchase, while it is not necessary for leasing.
• In hire purchase, the instalment comprises both the principal and interest in contrast to leasing, where the lessee merely pays for the cost of using the item.
• The Accounting Standard for Leasing is AS – 19; however, there is no specific Accounting Standard for Hire Purchasing.

Conclusion:

The hire purchase system is a credit buying system in which the hirer buys things on credit from the hire vendor and pays in instalments. Although the hirer has possession of the items from the date of the agreement, ownership of the asset is only transferred with the last instalment payment; until then, the hire vendor retains the tasset’s title. Hire purchase is considered an important agreement in which all the general rules of the law which all the hirer and the vendor need to fulfil for the smooth working of hire purchase system. This system is considered the most effective process as the purchaser can get the opportunity to buy expensive goods and can pay the amount later.