A transaction of finance whereby goods are bought & sold as per the terms & conditions specified below is known as ‘Hire Purchase Finance’1.Payment of periodic installments 2.Immediate possession of goods by the buyer3.Ownership of goods remaining with the vendor until the payment of the last installment 4.Treatment of each installment as hire charge till the payment of the installment

According to Hire Purchase Act – 1972, the term ‘hire purchase’ is defined as

“An agreement under which goods are let on hire & under which the hirer

has an option to purchase them in accordance with the terms of the

agreement.”

Under hire purchase system, the buyer takes possession of goods immediately and agrees to pay the total hire purchase price in instalment.

Each instalment is treated as hire charges. The ownership of the goods passes from buyer to seller on the

payment of the instalment. In case the buyer makes any default in the payment of any

instalment the seller has right to repossess the goods from the buyer and forfeit the amount already received treating it as hire charge.

The hirer has the right to terminate the agreement any time before the property passes. That is, he has the option to return the goods in which case he need not pay instalments falling due thereafter. However, he cannot recover the sums already paid as such sums legally represent hire charge on the goods in question.

A system of consumer financing, whereby the payment of the purchase price is deferred, to be pain in reasonable instalments is known as “Instalment Buying System”

An ordinary sale of goods with payment system The buyer obtains ownership & possession on

payment of the first instalment. No possibility of the article sold being returned to

the seller, since sale is complete immediately after the execution of the agreement

Seller has no right to recover possession of the goods if the buyer commits a defaults if the payment of outstanding instalments & there is no question of forfeiture of paid instalments against default. How ever he is entitled to recover his dues with the help of court.

Feature Hire Purchase Installment Buying

Actual SaleIt happens only at the payment of the last

installment

It happens when the first installment payment is

done

Legal Ownership

Until the last installment is made the ownership is with the Hire Purchase company

The buyer is the rightful ownership on the first installment payment

Right to sellA hire-purchaser cannot sell the article until the last hire

charge is paidThe buyer can sell the

article at any time

Legal Protection

The seller gets max protection by the law

The buyer gets maximum protection of

the law

Default The buyer can lose both the article & the entire amount

paid if there is a defaultNo risk of loss to buyer

even on default

Seller’s Ownership

The seller can get back ownership & possession if

there is a default

The seller cannot repossess but has

remedy, can sue buyer in the court

Feature Leasing Finance Hire Purchase

Down Payment No down payment is required

Down payment is required – to the extent of 20% to

25%

Ownership Ownership of the property lies with the finance company

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

installment

DepreciationLessor, & not the lessee, is

entitled to claim depreciation tax shield

The hirer(owner) is entitled to claim

depreciation tax shield

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

the leasing co

Capitalization of the asset is done in the books of the

hirer

Payments The entire lease payments

are eligible for tax computation in the books of

the lessee

Only the hire-interest is eligible for tax

computation in the books of the hirer

Salvage Value

The lessor & not the lessee has the right to claim the benefit of salvage value

The hirer cam claim benefit of salvage value as the prospective owner of

the asset

Feature Leasing Finance Hire Purchase

Magnitude Leasing is used as a source of finance usually for acquiring

high cost assets such as machinery, ships, airplanes.

HP is used as a source of finance. Usually low cost

assets such as automobiles, office

equipments

Nature of asset

An asset given on lease by a leasing company is considered as the fixed asset of the lessor

The hire vendor normally shows the asset let under

HP either as stock in trade or as receivables

Receipts All receipts from the lessee is taken into the lessor’s profit &

loss A/C

Only the interest portion is taken into the hire-

vendor’s P&L A/C