HIRE PURCHASEHIRE PURCHASE

PRESENTED BYPRESENTED BY : :ARUN KUMAR 08D0258ARUN KUMAR 08D0258

SANTHOSH 08D0213SANTHOSH 08D0213

JITHESH 08D0238JITHESH 08D0238

DEEPAK 08D0260DEEPAK 08D0260

RANJITH 08D0260RANJITH 08D0260

KROP 08D0287KROP 08D0287

Meaning Meaning Sales promotion device that creates customer Sales promotion device that creates customer

purchasing power in the form of a fixed cost, fixed purchasing power in the form of a fixed cost, fixed period installment loan, secured by a lien on the period installment loan, secured by a lien on the purchased item as the collateral. In case of capital purchased item as the collateral. In case of capital equipment the customer repays the loan from the equipment the customer repays the loan from the earnings generated by the purchased asset.earnings generated by the purchased asset.

characteristicscharacteristics PossessionPossession Ownership upon the full paymentOwnership upon the full payment Installment buyingInstallment buying Social innovationSocial innovation Expands economyExpands economy Additional incomeAdditional income

definitiondefinition AAccording to hire purchase act of 1972.“An agreement ccording to hire purchase act of 1972.“An agreement

under which goods are let on hire under which the under which goods are let on hire under which the hirer has an option to purchase them in accordance hirer has an option to purchase them in accordance with the terms of agreement and include an with the terms of agreement and include an agreement under which agreement under which

Possession of goods is delivered by the owner thereof Possession of goods is delivered by the owner thereof to a person on the condition that such person pays the to a person on the condition that such person pays the amount in periodic paymentsamount in periodic payments

The property of the goods is to pass to such a person The property of the goods is to pass to such a person on the payment of the last installment.on the payment of the last installment.

Such a person has a right to terminate the agreement Such a person has a right to terminate the agreement any time before the property so passes.any time before the property so passes.

Operation of HP transactionOperation of HP transaction

The finance company purchases the equipment from the The finance company purchases the equipment from the supplier and gives it on hire.supplier and gives it on hire.

The hirer is required to make a down payment of 20-25% of The hirer is required to make a down payment of 20-25% of the cost and pay the balance amount along with interest in the cost and pay the balance amount along with interest in advance or arrears over a time period of 36-48monthsadvance or arrears over a time period of 36-48months

Alternatively, instead of the down payment, the hirer as to Alternatively, instead of the down payment, the hirer as to deposit an equal amount as a fixed deposit with the finance co deposit an equal amount as a fixed deposit with the finance co which provides entire finance on hire purchase terms, which provides entire finance on hire purchase terms, repayable with interest in emi over 36-48 months.repayable with interest in emi over 36-48 months.

Continued…..Continued…..

Deposits and the accumulated interest is returned to the hirer Deposits and the accumulated interest is returned to the hirer upon the payment of last installment.upon the payment of last installment.

The interest on each hire purchase installment is computed on The interest on each hire purchase installment is computed on the basis of flat rate of interest is applied to the declining the basis of flat rate of interest is applied to the declining balance of original loan amount to determine the interest balance of original loan amount to determine the interest component of installment for a given flat rate of interest, the component of installment for a given flat rate of interest, the equivalent effective rate of interest is higher.equivalent effective rate of interest is higher.

Advantages & disadvantages Advantages & disadvantages

No immediate cash No immediate cash Easy possession Easy possession Economic growth Economic growth ThriftThrift Relief to buyerRelief to buyer

Reputed buyersReputed buyers May lead to bankruptcyMay lead to bankruptcy Buyer has to mortgage his Buyer has to mortgage his

propertyproperty Buyer may incur lossBuyer may incur loss May lose paid installments May lose paid installments

in the event of defaultin the event of default It is expensiveIt is expensive Loss to seller in the event of Loss to seller in the event of

default by the buyer.default by the buyer.

Hire purchase v/s installment Hire purchase v/s installment purchasepurchase

Deals with the terms of Deals with the terms of agreement and right of agreement and right of termination before the termination before the payment of last installmentpayment of last installment

The ownership is transferred The ownership is transferred to the hirer only when on to the hirer only when on payment of the last payment of the last installment.installment.

Deals with the buyer is Deals with the buyer is committed to pay full committed to pay full price.price.

The ownership in the The ownership in the goods purchased goods purchased purchased passes on to purchased passes on to the buyer along with the the buyer along with the payment of first payment of first installment.installment.

Leasing v/s hire purchaseLeasing v/s hire purchase Ownership of the property lies Ownership of the property lies

with lessor, not transferred to with lessor, not transferred to lessee.lessee.

Lessor, is entitled to claim Lessor, is entitled to claim depreciation tax shield.depreciation tax shield.

Capitalization of the asset is Capitalization of the asset is done in the books of lessor done in the books of lessor

The entire lease payments are The entire lease payments are eligible for tax computation in eligible for tax computation in the books of lesseethe books of lessee

Lessor income declines as the Lessor income declines as the investment o/s in lease investment o/s in lease declinesdeclines

Ownership of the property is Ownership of the property is transferred to the hirer on the transferred to the hirer on the payment of the last payment.payment of the last payment.

The hirer is entitled to claim The hirer is entitled to claim depreciation tax shield.depreciation tax shield.

Capitalization of asset is done Capitalization of asset is done in the books of hirer.in the books of hirer.

Only the hire interest is Only the hire interest is eligible for tax computation in eligible for tax computation in the books of the hirer. the books of the hirer.

Finance charges are allocated Finance charges are allocated to HP period equallyto HP period equally

Leasing v/s hire purchaseLeasing v/s hire purchase The lessor has the right to The lessor has the right to

claim the benefit of salvage claim the benefit of salvage valuevalue

Leasing is used as a source Leasing is used as a source of finance, usually for of finance, usually for acquiring high cost assets acquiring high cost assets i.e., machinary, ships, i.e., machinary, ships, airplanes,etcairplanes,etc

No down payment is No down payment is required for acquiring the required for acquiring the use of leased assets.use of leased assets.

Leased assets are disclosed Leased assets are disclosed by way of a note only in the by way of a note only in the books of lesseebooks of lessee

The hirer can claim benefit The hirer can claim benefit of salvage value as the of salvage value as the owner of the asset.owner of the asset.

H.P is used as a source of H.P is used as a source of finance usually for finance usually for acquiring relatively low cost acquiring relatively low cost assets i.e., automobiles, assets i.e., automobiles, office equipoffice equip

Down payment is required Down payment is required to be made for acquiring the to be made for acquiring the assets and a margin assets and a margin maintained to the extent of maintained to the extent of 20-25%20-25%

Asset bought on hire Asset bought on hire purchase will be shown as purchase will be shown as asset asset

Leasing v/s hire purchaseLeasing v/s hire purchase

The lessee has to maintain The lessee has to maintain the leased asset in case of the leased asset in case of financial lease, up keep is financial lease, up keep is the responsible of lessor in the responsible of lessor in case of operating lease.case of operating lease.

Not suitable for low capital Not suitable for low capital enterprisesenterprises

An asset given by a leasing An asset given by a leasing company is treated as fixed company is treated as fixed asset of lessorasset of lessor

All receipts from lessee is All receipts from lessee is taken into lessor p&l a/ctaken into lessor p&l a/c

The hirer is responsible to The hirer is responsible to ensure the maintenance of ensure the maintenance of asset bought.asset bought.

It is highly suitable for low It is highly suitable for low

capitalcapital enterprises which enterprises which need to show a strong asset need to show a strong asset position in their position in their balancesheetbalancesheet

The hire vendor normally The hire vendor normally shows the asset let under HP shows the asset let under HP either as stock in trade or either as stock in trade or receivablesreceivables

Only interest portion is Only interest portion is taken into vendor p&l a/ctaken into vendor p&l a/c

Hire purchase costHire purchase cost Hire purchase finance provides a high interest of Hire purchase finance provides a high interest of

income to HP company, they earn double the nominal income to HP company, they earn double the nominal interest rates applicable for normal lending.interest rates applicable for normal lending.

Under the various systems of consumer credit, Under the various systems of consumer credit, interest is calculated on the nominal rate that is added interest is calculated on the nominal rate that is added to the cash price of the asset purchased.to the cash price of the asset purchased.

The amount of installment is determined by dividing The amount of installment is determined by dividing the purchase price with number of months of credit the purchase price with number of months of credit provided by the financer.provided by the financer.

Interest liability remains the same through out the Interest liability remains the same through out the period of credit as interest is calculated on fixed cost period of credit as interest is calculated on fixed cost price of the asset.price of the asset.

Eligibility to enter into HP Eligibility to enter into HP transactionstransactions

People with a regular and stable income, and capacity to pay People with a regular and stable income, and capacity to pay installments from the current incomeinstallments from the current income

The person must be competent to enter into a contract . Minor The person must be competent to enter into a contract . Minor is not eligibleis not eligible

Foreigners and people not having permanent residence in the Foreigners and people not having permanent residence in the country are disqualified for availing such forms of credit sales.country are disqualified for availing such forms of credit sales.

Installment credit systems (ICS)Installment credit systems (ICS)

A system of customer financing, whereby the payments of the A system of customer financing, whereby the payments of the purchase price is deferred, to be paid in reasonable purchase price is deferred, to be paid in reasonable installments is known as ‘ installment credit systems’.installments is known as ‘ installment credit systems’.

Features :Features : An ordinary sale of goods with easy payment systemAn ordinary sale of goods with easy payment system The buyer obtains ownership and possession on payment of The buyer obtains ownership and possession on payment of

the first installmentthe first installment Payment is made through a number of installments.Payment is made through a number of installments. No possibilities of the article sold being returned to the seller, No possibilities of the article sold being returned to the seller,

since sale is complete immediately after the execution of the since sale is complete immediately after the execution of the agreement. agreement.

Hire purchase & installment systemHire purchase & installment system

SimilaritiesSimilarities::1.1. They are forms of consumer finance for the sale of They are forms of consumer finance for the sale of

expensive and durable goods.expensive and durable goods.2.2. They are recognized by the Indian sale of goods act.They are recognized by the Indian sale of goods act.3.3. Recovery of the price is through installments spread Recovery of the price is through installments spread

over a fixed period of time.over a fixed period of time.

Suitability:Suitability:1.1. Separate identity or individuality to facilitate their Separate identity or individuality to facilitate their

recovery when there is a default.recovery when there is a default.2.2. Durability to sustain the long period of installments Durability to sustain the long period of installments

and facilitate re possession in the event of a defaultand facilitate re possession in the event of a default

Continued…Continued…

Portability to facilitate re-possession in the Portability to facilitate re-possession in the event of default.event of default.

High enough value to justify a hire purchase High enough value to justify a hire purchase agreementagreement

Standard specifications to facilitate reselling, if Standard specifications to facilitate reselling, if necessarynecessary

Accounting standard on hire Accounting standard on hire purchase:purchase:

there is no separate accounting standard there is no separate accounting standard connected with hire purchase transaction. One connected with hire purchase transaction. One reason for this can be the fact that treatment of reason for this can be the fact that treatment of a financial lease is almost similar to that of a a financial lease is almost similar to that of a hirehire purchase transaction.purchase transaction.