Short note on the hire purchase agreement

A hire purchase agreement is a contract decided to enter into when choosing to buy expensive goods. The consumer makes a mortgage payment at the time of purchase, and the remaining balance is paid in instalments with interest.

Though hire purchase is not widely used in India, a similar concept known as a mortgage exists. A mortgage typically entails pledging an item previously owned by the borrower to obtain some spending money. Ownership of the item is transferred to the lender as long as the debt is repaid. The borrower purchases a new item through hire purchase.

In both cases, the lender will inherit the purchased goods until the borrower pays off the entire debt.

Understanding Hire Purchase Agreement

The concept of rent-to-own is very similar to that of hire purchase. The lessee will pay the rent for a property or a vehicle. If the lessee pays the actual sale price of the property or vehicle, he will have the option to own it at any time.

Customers prefer this option for purchasing expensive items because the cost can be spread out over several years rather than paying a large sum all at once. Again, until all payments are made, the borrower will not be the item’s owner. If the borrower fails to make payments, the lender may seize or sell the item to make up the difference.

Features of Hire Purchase Agreement

The terms of the agreement must include the following elements to be classified as a hire purchase agreement:

1. The owner delivers possession of goods to a person on the condition that such person pays the agreed amount in periodic instalments
2. property in the goods passes to such person upon payment of the last instalment
3. the person has the right to terminate the agreement before the property passes.
4. The agreement is supported by consideration in the form of regular rentals paid by the hirer to the owner and the hirer’s right to use the goods.

Benefits of Hire Purchase Agreement

• Companies in plant hire, road freight, construction, manufacturing, transportation, and engineering that are short on working capital can use hire purchase to deploy assets and machinery.
• A hire purchase agreement can boost a company’s return on capital employed (ROCE) and return on assets (ROA).

Issues of Hire Purchase

• They can be very expensive in the long run because a large sum is paid out as interest.
• Hire purchase adds administrative complexity to businesses.
• Individuals and businesses may be tempted to buy more than they need because of instalment payments.
• The agreement may be associated with a very high-interest rate, which may or may not be stated explicitly.

Parties to a Hire Purchase Agreement

The hirer and the owner are the two parties to a hire purchase agreement. The owner hires the goods for a set period, with a rental payment schedule in place and the option to purchase the goods at the end of the period. The parties entering into a hire purchase agreement must be legally capable of entering into a contract and intend to form a legal relationship.

Stamp Duty on Hire Purchase Agreement

According to the Indian Stamp Act, a hire purchase agreement, like any other ordinary agreement, requires stamp duty to be paid like any other ordinary agreement. On the other hand, a hire-purchase agreement does not need to be registered because it generally does not involve any immovable assets.

Example of Hire Purchase

A non-banking finance company primarily deals in hire-purchase transactions and funding for such transactions. These businesses facilitate the Hire-purchase agreement and take a stake in the top product’s value. Retailers and wholesalers, hire-purchase finance companies, and banks and financial institutions are the primary sources of funds for the hire purchase company.

Bajaj Finance, Cholamandalam is an example of a Hire Purchase company in India conducting a Hire-purchase agreement.

Conclusion

As a result, a Hire Purchase (HP) agreement is made when the buyer of an expensive asset cannot pay the full selling price of the asset at one time. As a result, with the vendor’s consent, the buyer agrees to pay some initial down payment at the time of asset delivery and the remaining amount is paid in instalments and interest. The vendor earns interest income in addition to profit margins on such transactions, and the buyer benefits by being able to use the asset without having to pay the full amount all at once.