Hire purchase is an arrangement for buying expensive consumer goods, where the buyer makes an initial down payment and pays the balance plus interest in instalments. Hire purchase agreements are similar to rent-to-own transactions that give the lessee the option to buy at any time during the agreement, such as rent to own cars. Like rent-to-own, hire purchase can benefit consumers with poor credit by spreading the cost of expensive items that they would otherwise not be able to afford over an extended time period. It’s not the same as an extension of credit, though, because the purchaser technically doesn’t own the item until all of the payments are made.
Because ownership is not transferred until the end of the agreement, hire purchase plans offer more protection to the vendor than other sales or leasing methods for unsecured items. That’s because the items can be repossessed more easily should the buyer be unable to keep up with the repayments.
Hire purchase means a transaction where goods are purchased and sold on the terms that:
- Payment will be made in instalments,
- The possession of the goods is given to the buyer immediately,
- The property (ownership) in the goods remains with the vendor till the last instalment is paid,
- The seller can repossess the goods in case of default in payment of any instalment, and
- Each instalment is treated as hire charges till the last instalment is paid.
Features of Hire Purchase:
The main features of a hire purchase agreement are as below:
1. The payment is to be made by the hirer (buyer) to the hiree, usually the vendor, in instalments over a specified period of time.
2. The possession of the goods is transferred to the buyer immediately.
3. The property in the goods remains with the vendor (hiree) till the last instalment is paid. The ownership passes to the buyer (hirer) when he pays all instalments.
4. The Hiree or the vendor can repossess the goods in case of default and treat the amount received by way of instalments as hire charged for that period.
5. The instalments in hire purchase include interest as well as repayments of principal.
6. Usually, the hiree charges interest on flat rate.
Case Law – In Madras the distinction between a hire-purchase agreement and a contract of sale was brought out in — ‘Auto Supply Co. Ltd. v V. Raghunatha Chetty’, 1929 Mad 884 (AIR V 16) (N). A motor-bus was delivered under a hire-purchase agreement which contained inter alia the following terms: The hirer was to pay Rs. 1,I40/- and thereafter Rs. 226/- every mouth for eleven months, the hirer acknowledged that he held the vehicle as a bailee of the owners and did not have any property in it until he exercised his option of purchase and the owners could terminate the contract of hiring and forthwith recover possession when there was a default in the payment of instalments. The hirer did commit a default and the owners terminated the hiring and claimed possession of the motor-bus.
It was held that the initial payment of Rs. 1,140/- was not by way of advance of rent but only as an instalment and that at the termination, of the agreement because of default, the hirer was not entitled to the routine of the initial payment.
Difference between sale of goods and hire purchase
The difference between sale and hire purchase can be drawn clearly on the following grounds:
- A contract of sale is one in which the customer buys or agrees to buy certain goods from a seller, at an agreed-upon price. On the contrary, Hire Purchase refers to a system of buying the asset, wherein buyer acquires the possession of the asset with down payment and completes the purchase by paying periodical instalments, and the seller retains the ownership until the final instalment against the asset is paid.
- The contract of sale is governed by the Sale of Goods Act, 1930, whereas the hire purchase contract is governed by the Hire Purchase Act, 1972.
- When a sale is made, the ownership of goods is transferred immediately to the buyer of the goods. On the contrary, in case of hire purchase, the ownership of the asset is transferred to the hire purchaser, on the payment of the last instalment.
- In case of a sale, the buyer’s position is that of the owner. In contrast, the position of the hire purchaser is just like a bailee in the contract of bailment, until he pays the final instalment due.
- In the sale, the payment is made in lumpsum, i.e. one-shot payment either in cash or via cheque or via online modes. As against, in hire purchase, payment is made in instalments.
- In the sale, the consideration covers the price of the goods purchased. Conversely, in hire purchase, the consideration includes the hire charges for the use of the asset, along with the price of the asset.
- On the non-payment of the amount due, in case of a sale, the seller can only take legal action against the buyer but cannot take back the goods. However, in hire purchase, the hire vendor can repossess the goods, when the hire purchaser defaults in payment.
- In case of sale of goods, the buyer cannot terminate the contract, and he/she is obligated to pay the price. On the flip side, the hire purchaser can terminate the contract by returning the asset to the vendor and has no liability to pay the instalments in full.
- In the case of hire purchase, the hire vendor does not have to bear the risk of loss due to the insolvency of the hire purchaser because the hire vendor can simply repossess the goods. As opposed, in case of a sale, the seller of the goods has to bear the loss due to insolvency.
- When it comes to repairing, the hire vendor has to bear the expenses of repair in case of hire purchase. Contrastingly, in a sale contract, the buyer of the goods bears any expenses related to the repair of the goods, once the goods are sold.
- In case of a sale, the buyer becomes the ultimate owner of the goods, and so the buyer can transfer a good title to the third party. On the other hand, in case of hire purchase, as only the possession of the asset changes and not the ownership, the hire purchaser cannot transfer a good title to the third party.
The contract of sale can be oral or written, that means there is no compulsion as to the writing of the contract. However, in case of hire purchase, the contract has to be in writing and must be signed by both the parties – hire purchaser and hire vendor.
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