HIRE-PURCHASE - 2

Modus Operandi

The modus operandi of a hire purchase transaction is as follows:

 The finance (hire purchase) company purchases the equipment from the supplier
and gives it on hire.

 The hirer is required to make a down payment of 20-25% of the cost and pay the
balance amount along with the interest in EMI, in advance or arrears over a time
span of 36-48 months.

 Alternately, instead of the down payment, the hirer has to deposit an equal amount
as a fixed deposit with the finance company which provides the entire finance on
hire purchase terms, repayable with interest in EMIs over 36-48 months.

 Deposit and the accumulated interest is returned to the hirer upon payment of the
last installment.

 The interest on each hire purchase installment is computed on the basis of flat rate
of interest and the effective rate of interest is applied to the declining balance of the
original loan amount to determine the interest component of installment. For a
given flat rate of interest, the equivalent effective rate of interest is higher.

Hire Purchase Vs Installment Payment System

Hire Purchase Installment Payment System

Sale
The hirer has the option to purchase
the goods anytime during the term of
the agreement. He also has the right
to terminate the agreement at anytime
before payment of the last installment.
Sale
The sale has already taken place, the
goods have already been delivered to
to the owner and the buyer is bound to
pay the full price.

Ownership Ownership
Ownership is passed to the hirer only Ownership is transferred to the
if he exercises the option to purchaser on payment of the
purchase. first installment.
 Hire Purchase Vs Lease Financing

Hire Purchase Lease Financing

Ownership Ownership
The ownership of the equipment The lessor company is the owner
passes to the hirer on payment and the lessee is entitled only to
of the last installment. the use of the leased equipment.

Depreciation Depreciation
The hirer is entitled to the Depreciation on the asset is charged in
depreciation shield on the assets the books of the lessor.
hired by him.

Tax Benefits Tax Benefits

Hirer is allowed the depreciation claim The lessor is allowed to claim
and finance charge and the seller may depreciation and lessee is allowed to
claim any interest on borrowed funds to claim rentals and maintenance cost
acquire the asset for tax purposes. Against taxable income.

Maintenance Maintenance
Cost of maintaining the hired Maintenance of the leased asset is the
equipment is to be borne by the responsibility of the lesse.
hirer itself.

Extent Extent
20-25% of the cost of the equipment No down payment is required from the
is required to be paid by the hirer as down lessee.
payment.

Magnitude Magnitude
The magnitude of funds involved is The magnitude of funds involved is
relatively low. very large.

Subjects of hire purchase Subject of Lease Financing

Automobiles, generators, Aircrafts, ships, machinery are taken
office equipment etc. are usually on financial lease.
hire purchased.