Introduction And Meaning Of Hire Purchase System
Hire purchase system refers to the credit purchase in which purchaser obtains goods by making partial payment and agrees to make regular payment on installment basis. Buyer can use the asset but ownership remains with the seller. Ownership will be transferred after making the full payment. This financing option is very useful to buy expensive and durable assets such as car, machinery, furniture etc.
Features Of Hire Purchase
Some notable features or characteristics of hire purchase system of financing can be highlighted as follows:
1. Parties Involved
Generally, three parties are involved in hire purchase:
a) Selling party: Vendor or supplier who sells goods/items
b) Hiring party: Buyer or hire purchaser who buys goods
c) Financing Party: Company that provide funds to purchase assets
2. Spread The Cost
Hire purchase is a feasible financing option for acquiring valuable or expensive assets because it allows buyers to spread the total cost into periodic installments. So, hirer can obtain expensive goods conveniently.
3. Use Of Assets
Buyer can obtain and use assets immediately after making down payment (partial payment) and hire purchase agreement.
4. Ownership Of Assets
Although the hire purchaser can use the assets, ownership of such asset remains with vendor until the final payment is done. Ownership will be transferred to the buyer after the last installment.
5. In Case Of Default Payment
Seller can seize the asset at any time if the purchaser defaults.
Also Read
Features of installment purchase system
Advantages And Disadvantages Of Hire Purchase
Difference Between Hire Purchase And Installment
6. Selling Of Asset
Hire purchaser cannot sell or transfer the item to other party until the final payment is made and ownership is transferred.
7. Return Of Asset
Buyer can return item to the seller but cannot claim back money he/she paid as installments.
8. Repairing And Maintenance Charge
Generally, vendor is responsible for repairing and maintenance of asset because he/she is the real owner of the item.
9. Installment Frequency
Frequency of installment is mentioned while making the purchasing agreement. Installment frequency may be daily, weekly, monthly or quarterly.
10. Tax Benefits
It provides tax benefit to both vendor and purchaser. Vendor can claim depreciation on asset and buyer can claim tax benefit on installment charges.