HIRE PURCHASE SYSTEM IN VALUATION-ALL YOU NEED TO KNOW

HIRE PURCHASE SYSTEM IN VALUATION

ALL YOU NEED TO KNOW

Under the Hire-purchase system, goods are delivered to a person who agrees to pay the owner by equal periodical installments.

Such installments are to be treated as hire of these goods until a certain fixed amount has been paid when these goods become the property of hire

Meaning of Hire Purchase

Hire purchase means a transaction where goods are purchased and sold on the terms that

1) payment will be made in installments

2) the possession of the goods is given to the buyer immediately

3) the property (ownership) in the goods remains with the vendor till the last installment is paid

4) the seller can repossess the goods in case of default in payment of any installment

5) each installment is treated as hire charges till the last installment is paid

Features of Hire Purchase

1) the payment is to be made by the hirer (buyer) to the hirer, usually the vendor, in installments 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 installment is paid, the ownership passes to buyer (hirer) when he pays all installments

4) the hiree or the vendor can repossess the goods in case of default and treat the amount received by way of installments as hire charged for that period

5) the installments in hire purchase include interest as well as repayments of principal

6) usually, the hiree charges interest on flat rate

Hire Purchase Agreements

1) the owner hires goods to the hirer with an option to purchase the goods when he has made the payment of certain sum

2) the purchaser who is unable to pay the full price of asset at one lump sum gets facilities to acquire an asset and after making the payment of an initial amount called premium, the purchaser pays the balance consideration money in installments

3) after the payment of all installments, the property in the goods passes to the hirer

4) the hirer has an option to return the goods during the period of hire

5) the hirer has the right to terminate the agreement for hire at his pleasure and is not bound to pay the value of goods

6) it is a form of bailment, the hirer is given right to purchase the goods on certain conditions, that however, is an option not an obligation to purchase

7) title passes to hirer after payment of all installments

8) hirer is entitled to return the goods ND terminate the agreement in the manner provided therein

Termination of Hire Purchase Agreement

1) In terms of agreement

The agreement stipulates the circumstances in which the agreement can be terminated

2) By Performance

The agreement is terminated by performance on the exercise of the option to purchase the goods by the hirer

3) By renewal

The parties to an agreement may enter into a fresh agreement terminate the Hire-purchase agreement, which had not already been terminated

4) Notice by either party

The Hire-purchase agreement can be terminated by notice given by either party

5) By acceptance of repudiation by other party

An agreement is terminated, when a party to an agreement renounces his future obligations under the agreement or commits a breach of agreement, which indicates that he does not want to remain bound by its provisions, and the other party accepts the renunciation or breach as discharging the contract

6) By release

Where one party to an agreement releases the other party from the performance of obligations by him under the agreement, the agreement comes to an end

7) By frustration

When the performance of the agreement becomes impossible by reason of some act or event occurring subsequent to the formation of the agreement, comes to an end and the parties will be discharged from further obligations under the agreement eg when the goods are destroyed during the currency of Hire-purchase agreement without negligence of the hirer, the agreement cones to an end

8) By the efflux of time

When the hirer is given time to exercise option to purchase the goods within a stated period and he does not exercise the option within the said period, the agreement comes to an end

Registration of Hire-purchase agreement

The registration of a hire purchase agreement is not necessary, as no immovable property is conveyed thereby to the hirer

Standard provisions in the Hire-purchase agreement

1) a clear description of goods

2) the cash price for the goods

3) the HP price (ie the total sum that must be paid to hire and then purchase the goods)

4) the deposit

5) the monthly installments

6) a reasonably comprehensive statement of the party’s rights (sometimes including the right to cancel the agreement during a cooling off period)

7) the right of the hirer to terminate the contract when he feels like doing so with a valid reason

Implied warranties and conditions to protect the hirer

Varies from jurisdiction to jurisdiction

1) the hirer will be allowed to enjoy quiet possession of goods, ie no one will interfere with the hirer’s possession during the term of the contract

2) the owner will be able to pass title, or ownership of the goods when the contract requires it

3) that the goods are merchantable quality and fit for their purpose, save that exclusion clauses may, to a greater or lesser extent, limit the finance company’s liability

4) where the goods are let by reference to a description or to a sample, what is actually supplied must correspond with the description and the sample

The Hirer’s Right

1) to buy the goods at any time by giving notice to the owner and paying the balance of the HP price less the rebate

2) to return the goods to the owner

3) with the consent of the owner, to assign both the benefit and the burden of the contract to a third person, the owner cannot unreasonably refuse consent where the nominated third party has a good credit rating

4) where the owner wrongfully repossess the goods, either to recover the goods plus damage for loss of quiet possession or to damages representing the value of goods lost

The Hirer’s obligations

1) to pay the installment

2) to take reasonable care of goods

3) to inform the owner where the goods will be kept

4) a hirer can sell the products if, and only if, he/she has purchased the goods finally or else not to any other third party

The Owner’s Rights

1) the owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in agreement

1) to forfeit the deposit

2) to retain the installments already paid and recover the balance due

3) to repossess the goods (which may have to be by application to a Court depending on the nature of goods and the percentage of the total price paid)

4) to claim damages for any loss suffered

Calculation of Hire-purchase price

HP price = cost price + profit margin + interest on outstanding balance

HP system is generally imposed on the goods which have a good resale value in the market

Key takeaways of the Hire-purchase system

1) Act

It is regulated by the Hire Purchase Act, 1972

2) Parties

It is an agreement between the hirer and hires a vendor for hiring an asset

3) Claiming rights

In case the hirer fails to make a payment, the hire vendor can sue or claim only for the return of the asset and not for the remaining due installment payments

4) Selling rights

Hirers cannot sell or mortgage the hired asset until ownership gets transferred to them

5) Loss bearer

Hire vendor remains liable for any loss of goods until ownership gets transferred to the hirer

Advantages of Hire Purchase system

1) you can access newer, higher specification cars

2) you can spread the cost over a fixed term

3) the interest rate is fixed

4) you will own the car at the end of the agreement

5) option to pay off loans early

6) there are fewer restrictions

Disadvantages of Hire Purchase System

1) the loan is secured against the vehicle

2) it will cost more overall

3) monthly payments are based on credit ratings

4) it can be expensive for short term agreements

5) missing or late payments could affect your credit score

APR on Hire Purchase

Annual percentage rate (APR) is a way of measuring the interest rate (and any other charges which are applied) to a number of financial products such as personal loans, credit cards and hire purchase agreements

Meaning of zero APR

A 0% APR means that you pay no interest on certain transactions during a certain period of time

Depreciation in Hire Purchase

In hire purchase, depreciation can be claimed by the hirer

Accounting standards applicable for hire purchase system

The institution of chartered Accountants of India (ICAI) has issued accounting standard no 19(AS 19) on accounting for leases

Products to be sold under the HP system generally

1) durable

2) high in quality

3) fashionable

4) standardized

5) high prices