By Rahul Jain
Hire Purchase is a method of acquiring assets
without having to invest the full amount in
buying them.
Typically, a hire purchase agreement allows the
hire purchaser sole use of an asset for a period
after which they have the right to buy them,
often for a small or nominal amount. The
benefit of this system is that companies gain
immediate use of the asset without having to
pay a large amount for it or without having to
borrow a large amount.
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The owner of the asset gives the possession
of the asset to the Hirer with an
understanding that the Hirer will pay
agreed installments over a specified period
of time.
The ownership of the asset will transfer to
the hirer on the payment of all installments.
The Hirer will have the option of
terminating the agreement any time before
the transfer of ownership of assets. (
Cancellable Lease)
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Hence Hire purchase is where a buyer cannot afford to pay the asked
price as a lump sum but can afford to pay a percentage as a deposit, the
contract allows the buyer to hire the goods for a monthly rent.
When a sum equal to the original full price plus interest has been paid in
equal installments, the buyer may then exercise an option to buy the
goods at a predetermined price (usually a nominal sum) or return the
goods to the owner.
If the buyer defaults in paying the instalments, the owner can repossess
the goods which differentiates HP from other unsecured consumer credit
systems and benefits the economy because markets can expand while
minimising the seller's exposure to risk of default. Equally, HP is
advantageous both to private consumers because it spreads the cost of
expensive items over an extended time period, and to certain business
consumers in that the balance sheet and taxation treatment of hire
purchased goods differs from outright capital purchases. The need for HP
is reduced when consumers have collateral or other forms of credit are
readily available.
The asset is put on the balance sheet of the hirer,
with a corresponding liability, and the hire
installments are broken into principal and
interest, with the latter being taken as the hirevendor's income and the hirer's expense.
Hire vendor record it as receivables
Hire Purchase Financing
Lease Financing
Hirer is entitled to claim
Depreciation Tax Shield.
Lessee is not entitled to claim
depreciation tax shield.
Hirer can charge only interest
Portion.
Lessee can charge the entire
lease payments as expense for
tax computation.
Once the hirer has paid all
instalments, he becomes the
owner of the asset and can
claim its salvage value.
Lessee does not become the
owner of the asset. Therefore
he has no claim over the asset
salvage value.
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Installment Sale is a credit sale and the legal
ownership of the asset passes immediately
to the buyer as soon as the agreement is
made between the buyer and the seller.
Except for the timing of the transfer of
ownership, installment sale and hire
purchase are similar in nature.