Assignment on Hire Purchase Finance and Consumer credit

An

Assignment

On

Hire purchase finance and

consumer credit

IN PARTIAL FULFILLMENT OF THE REQUIREMENT

IN SEMISTER IV IN THE SUBJECT OF MFS
MASTER OF BUSINESS ADMINISTRATION

SUBMITTED TO:

Ms. KHUSHBU SHAH

SUBMITTED BY:

CHAUDHARY SURESH (805)

DAYMA HIRAL (806)

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 Assignment on Hire Purchase Finance and Consumer credit

CONTENT

Sr.no. Particulars P.no

1. Introduction 1

2. Features 1

3. The Hirer’s right 2

4. HP – Legal Framework 3

5. The hirer’s obligations 7

6. The owner’s rights 7

7. Advantages of Hire Purchase 7

8. Disadvantages of Hire 8
Purchase

9. Consumer Credit 9

10. Feature of consumer credit 9

11. Illustration 11

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 Assignment on Hire Purchase Finance and Consumer credit

Introduction

 Hire Purchase is an agreement to hire an asset over a predefined

period with an option to purchase as the end of the agreement.

 With a hire purchase agreement, after all the payments have been
made, the business customer becomes the owner of the equipment.
This ownership transfer either automatically or on payment of an
option to purchase fee

Features

 Under hire purchase system, the buyer takes possession of goods

immediately & agrees to pay the total hire purchase price in
instalments

 Each instalments is treated as hire charges

 The ownership of goods passes from buyer to seller on the payments

of the instalments

 In case the buyer makes any default in payments of any instalments

the seller has right to reposes the goods

 Normally a deposit is requested i.e. 10%

 Funding Period- periods are normally between 3-7 years

 Rather than pay for the asset outright using cash, it can often make
sense for businesses to look for ways of spreading the cost of
acquiring an asset, to coincide with the timing of the revenue
generated by the business. The most common sources of medium
term finance for investment in capital assets are Hire Purchase and
Leasing.

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 Assignment on Hire Purchase Finance and Consumer credit

 Leasing and hire purchase are financial facilities which allow a business
to use an asset over a fixed period, in return for regular payments.

 Many kinds of business asset are suitable for financing using hire
purchase or leasing, including:

- Plant and machinery

- Business cars
- Commercial vehicles
- Agricultural equipment
- Hotel equipment
- Medical and dental equipment
- Computers, including software packages
-Office equipment

The hirer's rights

 To buy the goods at any time by giving notice to the owner and paying
the balance of the Hire purchase price

 To return the goods to the owner — this is subject to the payment of a

penalty to reflect the owner's loss of profit

 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
good credit rating

 Where the owner wrongfully repossesses the goods, either to recover

the goods plus damages for loss of quiet possession or to damages
representing the value of the goods lost.

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 Assignment on Hire Purchase Finance and Consumer credit

Hire Purchase – legal framework

• HP act 1972.

• Two aspects of HPA – Bailment of goods, element of sale.

• Essential Ingredients of Sale: Two parties, Goods, Money

Consideration, Transfer of Ownership, Essentials of a valid contract.

• Sale Vs Bailment: Sales – conveyance of property from seller to buyer

for a price. Bailment: mere transfer of possession of goods to bailee,
with no conveyance intended.

• Sale vs. Hire Purchase : Differences :

• In HP the possession of the goods with hirer, while ownership with

original owner.

• No agreement to buy, but only option to buy under certain conditions.

• Ownership to hire, only when he exercises his option by making full

payment.

• Destruction of goods before making the contract: destruction/damage,

without the knowledge of the seller, such that goods do not match the
description in Contract, then contract null and void.

• Destruction of goods, after Agreement to Sell but before Sale: damage

without fault of buyer/seller, agreement is void, provided ownership is
not passed on.

• Document of Title to Goods: document which enables to deal with

goods as owner. E.g. Cash Memo, bill of lading, dock warrant, lorry
receipt, Railway receipt, Delivery order.

• Earnest Money/Security Deposit: payment by buyer in advance, for

due performance of contract. In case of default, liable to be forfeited,
and contract goes off.

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 Assignment on Hire Purchase Finance and Consumer credit

• Conditions and Warranties: relating to nature and quality of goods and

their fitness for the buyer’s purpose. Condition – stipulation which
forms the basis of the contract. Warranty – stipulation which is
subsidiary to the main purpose of the contract. Legal implications
different for both.

• Implied Conditions :

• - Condition as to Title in case of Sale/Agreement to sell.

• - Condition as to Description

• - Condition as to Merchantability

• - Condition as to Wholesomeness.

• Implied Warranties: any of the above plus Quite Possession , Freedom

from Encumbrances.

• Doctrine of Caveat Emptor (let the buyer beware): applicable to

all sale contracts when buyer relies on his own skill & judgment for
suitability of the goods for his purpose.

• Then seller cannot be held responsible if there are defects in the

goods., except where

• buyers purpose informed to the seller

• Goods sold by description by a manufacturer/seller.

• Seller fraudulently misrepresents the latent defects.

• Transfer of Property in Goods :

• Two essential requirements :

• - Goods must be ascertained & The parties must intend to pass the
property in the goods.

• Rules for Transfer of Property

• Specific goods in Deliverable State: Property in the goods passes to

the buyer when the contract is made, irrespective of whether , the
time of payment of the price or time of delivery of the goods is
postponed.

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 Assignment on Hire Purchase Finance and Consumer credit

• Specific goods to be Put in Deliverable State: property in goods does

not pass till the seller converts the goods to a deliverable state.

• Specific goods to be Weighed or Measured :

• If seller required to weigh, measure, test the goods for ascertaining

the price, then Property does not pass till the same is done, and buyer
has notice thereof.

• Goods sent on approval (sale or return basis): property in goods

passes on to the buyer, after he has signified his approval, or if he
does not signify the approval, but does not reject it either till the valid
date, then property passes to the buyer.

• Reservation of Rights of Disposal :

• If seller reserves the rights of disposal of goods until certain conditions

are fulfilled, then property does not pass on to the buyer till those
conditions are complied with.

• Delivery of Goods: it may be actual, symbolic or constructive.

• Rules of Delivery :

• Part Delivery: a delivery of part of the goods, in progress of the whole

delivery, is delivery of the whole. But intentional part delivery is not
whole delivery.

• Buyer to Apply for Delivery: seller not bound to deliver, unless buyer
applies for delivery.

• Seller’s Duty to deliver: he is duty bound to deliver goods on

application by buyer, in accordance with the terms of the contract.

• Place & Time of Delivery: place & time of delivery as per contract.
Otherwise delivery at the place of the goods, at the time of
agreement.

• Other rules regarding Cost, quantity, delivery in installments.

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 Assignment on Hire Purchase Finance and Consumer credit

• Rights of the Unpaid Seller :

• Against Goods and Against the Buyer.

• Right to Lien: an unpaid seller with possession of goods will retain

them where the goods are no sold under credit, sold on credit but
credit has expired or the buyer becomes insolvent.

• Right to Stoppage in Transit: if the buyer is insolvent, then unpaid

seller has the right to repossess in transit.

• Right of Resale: allowed under limited situations, where the goods are
of perishable nature – resale possible without notice to buyer/ or after
notice of resale buyer does not pay up/ or when the seller has under
the contract right for resale without any prior notice.

• Buyer’s Remedies Against the Seller :

• Suit for Damages for Non Delivery: where there is wrongful neglect
ion or seller refuses to deliver the goods.

• Suit for price – non delivery after payment.

• Suit for Specific performance – where the contract is for specific

goods, suit for delivery of the same goods.

• Suit for Repudiation of Contract before due date – where the

seller repudiates the contract before the date of delivery, buyer would
sue the seller for anticipatory breach.

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 Assignment on Hire Purchase Finance and Consumer credit

The hirer's obligations

 The hirer usually has the following obligations:

 to pay the hire instalments

 to take reasonable care of the goods (if the hirer damages the goods
by using them in a non-standard way, he or she must continue to pay
the instalments and, if appropriate, compensate the owner for any loss
in asset value)

 To inform the owner where the goods will be kept.

The owner's rights

The owner usually has the right to terminate the agreement where the
hirer defaults in paying the instalments or breaches any of the other
terms in the agreement. This entitles the owner

 to forfeit the deposit

 to retain the instalments already paid and recover the balance due

 to repossess the goods (which may have to be by application to a

Court depending on the nature of the goods and the percentage of the
total price paid)

 To claim damages for any loss suffered.

Advantages of Hire Purchasing

 Cash flow: payment by instalments.

 Writing down allowances applies.

 Hire purchase is an alternative funding line to bank overdrafts

 Attracts fixed rate interest.

 Others same as Outright Purchase.

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 Assignment on Hire Purchase Finance and Consumer credit

Disadvantage of hire purchasing

 Inflexible: difficult to escape the outstanding settlement if say, a
vehicle is no longer required.

 High deposit compared to contract hire.

 Business hire purchase appears as a debt on the balance sheet which

could inhibit future borrowing.

 More expensive than contract hire

 Burden of controlling and running fleet

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 Assignment on Hire Purchase Finance and Consumer credit

Consumer Credit
Includes all asset-based financing plans offered to primarily
individuals to acquire consumer goods. Typically, in consumer credit
transaction the individual consumer buyer pays a fraction of the cash
purchase price at the time of the delivery of the asset and pays the balance
with interest over a specified period of time.

Features
The features of consumer credit are: (1) Parties to the transaction

(2) Structure of the transaction (3) Mode of payment (4) Repayment period
and rate of interest, and (5) Security

(1) Parties to the transaction

The parties to a consumer credit transaction depend upon the

nature of the transaction: (a) A tripartite arrangement, there are two
parties, namely borrower-consumer-customer and dealer-cum-financier; (b)
a tripartite arrangement where the parties are dealer, financier and the
customer. The dealer in this type of arrangement arranges the credit from
the financier.

(2) Structure of the transaction

A consumer credit arrangement can be structure in three ways:

Hire purchase The customer has the option to purchase the assets.
But he may not exercise the option and return the goods according to the
terms of the agreement. Most of the tripartite consumer credit transaction is
of this type.

Conditional sale The ownership is not transferred to the customer

until the total purchase price including the credit charge is paid. The
customer can’t terminate the agreement before the payment of the full
price.

Credit sales The ownership is transferred to the customer on

payment of the first installment. He can’t cancel the agreement.

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 Assignment on Hire Purchase Finance and Consumer credit

(3) Mode of payment

From the point of view of payment, the consumer credit

arrangements fall into two group: (a) down payment schemes and (b)
deposit-linked schemes. The down payment may range between 20-25
percent of the cost while the deposit may vary between 15-25% of the
amount financed at compound rate of interest. Some arrangements also
provide zero deposit schemes with higher equated monthly installment
(EMI).

(4) Payment period and rate of interest

A wide range of options are available. Typically, the repayment

period ranges between 12-60 monthly installments. The rate of interest is
normally expressed at flat rate; the effective rate of interest is generally not
disclosed. In some schemes, the rate of interest is not disclosed; instead the
EMI associated with the different repayment periods is mentioned. Most of
the schemes provide for easy repayment. They also provide for either a
rebate for prompt payment and charge for delayed payment.

(5) Security

Is generally in the form of first charge on the asset. The

consumer can’t sell/pledge/hypothecate the asset.

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 Assignment on Hire Purchase Finance and Consumer credit

Illustration (Flat and Effective Rates of interest)

The hypothetical consumer finance Ltd. (HCFL) has structured a

consumer credit deal for Rs. 4, 00,000 on the following basis:

Monthly repayment period Equated monthly installment

12 Rs 38,000

24 Rs 21,400

Required: compute the flat and effective rates of interest for each
alternative/option.

Solution:

Flat and effective rates of interest

Repayment period (months)

12 24

Total charge for credit Rs 56,000 Rs 56,800

Flat rate of interest (%) 0.14 0.142

Effective rates of interest (%) 0.2528 0.2726

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 Assignment on Hire Purchase Finance and Consumer credit

Working notes:

1. Total annual charge for credit = (38,000*12) – 4,00,000

= Rs 56,000

= [(21,000*24)-(4, 00,000)]/2

= Rs 56,800

2. Flat rate of interest = (56,000*100)/4,00,000

= 0.14

= (56,800*100)/4, 00,000

= 0.142

3. Effective rate of interest = n *2f

n+1

= (12*28)/13

= 25.85%

= (24*28.4)/25

= 27.67%

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