Meaning and Concept of Hire-purchase system
A trader
could sell goods either for cash or for credit. For goods sold on credit, the
payments may be made by the buyer in lump sum on a future date, or in
installments spread over for a specified period of time.
When goods
are sold on credit, for which payment is made by the buyer in installments over
a period of time, it is called purchase system or installment system.
Hire Purchase
System defers to the system wherein, the seller of goods delivers the goods to
the buyer without transferring the ownership of goods. The payment for the
goods will be made by the buyer in installments. If the buyer pays all the
installments, the ownership of the goods will be transferred, on payment of the
last installment.
However, if the buyer does not pay for any installment, the
goods will be repossessed by the seller and the money paid on earlier
installments will be treated as hire charges for using the goods. So, under
this system, the transaction may result in purchasing of goods by the buyer or
in hiring the goods. Hence, the system is called Hire Purchase System.
Hire-purchase system is a special system of purchase and sale of goods. Under this system purchaser pays the price of the goods in installments. The installments may be annual, six monthly, quarterly, monthly fortnightly etc.
Under this system the goods are delivered to the purchaser at the time of agreement before the payment of installments but the title on the goods is transferred after the payment of all installments as per the hire-purchase agreement. The special feature of a hire-purchase transaction is that the payment of every installment is treated as the payment of hire charges by the purchaser to the hire vendor till the payment of the last installment . After the payment of the last installment the amount of various installments paid is appropriated towards the payment of the price of the goods sold and the ownership or the goods is transferred to the purchaser. Thus hire-purchase means a transaction where the goods are sold by vendor to the purchaser under the following conditions :
- the goods will be delivered to the purchaser at the time of agreement.
- the purchaser has a right to use the goods delivered.
- the price of the goods will be paid in installments.
- every installment will be treated to be the hire charges of the goods which is being used by the purchaser.
- if all installments are paid as per the terms of agreement , the title of the goods is transferred by vendor to the purchaser.
- if there is a default in the payment of any of the installments the vendor will take away the goods from the possession of the purchaser without refunding him any amount received earlier in the form of various installments.
Characteristics of Hire-purchase system
Before discussing the characteristics of hire-purchase system, we must know what is a hire purchase agreement and what are the contents of a hire-purchase agreement. Hire-purchase agreement means a contract between the hire vendor and the hire purchaser regarding the sale of goods under certain conditions. Usually every hire-purchase agreement shall contain the following terms:
- the cash price of the goods, cash price means the price at which goods may be purchased against cash payment.
- the hire-purchase price, hire purchase price means the total amount which is payable by the hire-purchaser under the agreement.
- the date on which the hire-purchase agreement will commence.
- the description of the goods that will be delivered to the hire-purchaser at the commencement of the agreement.
- the number of installments to be paid by the hire-purchaser along with the amount of each installment and the date of payment of each installment.
- the down payment if any, the down payment means the amount which is required to be paid by hire-purchaser to the hire vendor at the time of commencement of hire-purchase agreement.
- the rate interest charged by the hire vendor (optional).
Characteristics of Hire-Purchase System
The characteristics of hire-purchase system are as under
- Hire-purchase is a credit purchase.
- The price under hire-purchase system is paid in installments.
- The goods are delivered in the possession of the purchaser at the time of commencement of the agreement.
- Hire vendor continues to be the owner of the goods till the payment of last installment.
- The hire-purchaser has a right to use the goods as a bailer.
- The hire-purchaser has a right to terminate the agreement at any time in the capacity of a hirer.
- The hire-purchaser becomes the owner of the goods after the payment of all installments as per the agreement.
- If there is a default in the payment of any installment the hire vendor will take away the goods from the possession of the purchaser without refunding him any amount.
Difference Between and Hire Purchase
Although hire
purchase system could ultimately result in sale of goods, the sale in normal
sense and sale under hire purchase system are not the same. The following are
the differences between sale and hire purchase.
Hire Purchase
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1.
A
‘sale’ is governed by the sale of Goods Act, 1930.
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1.
Hire
purchase is governed by the Hire Purchase Act, 1972.
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2.
In
case of sale, the ownership of the goods is transferred to the buyer
immediately.
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2.
In
case of Hire purchase, the ownership of goods is transferred to buyer on
payment of all installments.
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3.
In
case of sale, the buyer makes payment in lumpsum. (if the lumpsum payment is
made immediately on transfer of ownership and possession of goods, it is
called Cash Sale and if the payment is made on a specified future date, it is
called credit sale.
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3.
In
case of hire purchase, the payment is made in installments.
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4.
The
buyer pays only for the price of goods.
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4.
The
hire purchaser pays for the price of goods and also some amount of interest.
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5.
On
non-payment of the consideration the seller cannot take back the goods, but
can only take legal action on buyer.
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5.
On
non-payment of any installment, the seller can re-possess the goods.
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6.
Once
a sale has taken place, neither the seller, nor the buyer can terminate the
contract (unless it is for genuine reason like damage of goods etc.)
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6.
Either
the buyer or the seller can terminate the contract at any point of time,
until the payments of last installment.
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7.
When
the buyer becomes insolvent, the seller has to undertake the risk of loss.
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7.
When
the hire purchaser becomes insolvent, the seller can reposes the goods, and
hence need not undertake the risk of loss.
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8.
A
sale is subject to levy of sales tax at the time of contract of sale.
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8.
In
this case, the sales tax will be lerviable at the time of ownership (i.e. on
payment of last installment).
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Difference Between Hire Purchase And Installment System
Installment
Payment System
It is system of purchase and sale of
goods in which title of goods is immediately transferred to the purchaser at
the time of sale of goods and the sale price of the goods is paid in
installments. In the event of default in payment of any installment, the seller
has no right to take back goods from the possession of the purchaser. He can
file a suit for the recovery of the outstanding balance of the price of goods
sold. The followings are the differences between Hire-purchase system and
Installment payment system:
Hire-Purchase
system
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Installment
purchase
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It
is a contract of hiring
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It
is a contract of sale
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It
is transferred by seller to buyer only after payment of all installments
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It
is transfer by seller to buyer, immediately on signing the contract
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In
this case, the buyer is like a bailee
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In
this case, the buyer is not in the position of a bailee
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Such
risk is on the seller
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Such
risk is on the buyer
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On
the default of payment of any installment by the buyer, the seller can
repossess the goods
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On
default and payment of any installment by the buyer, seller cannot repossess
the goods, but can file a suit in the court of law against the buyer for the
recovery of unpaid price.
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The
buyer can exercise the option of return of goods
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The
buyer cannot exercise the option of return of goods
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The
buyer cannot dispose the goods, until the payment of last installment. If
disposed, the third party buyer does not get a better title.
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The
buyer has the right to dispose the goods, even if all installments are not
yet paid.
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