By Rahul Jain

Hire Purchase is a method of acquiring assets without having to invest the full amount in buying them.

Typically, a hire purchase agreement allows the hire purchaser sole use of an asset for a period after which they have the right to buy them, often for a small or nominal amount. The benefit of this system is that companies gain immediate use of the asset without having to pay a large amount for it or without having to borrow a large amount.

The owner of the asset gives the possession of the asset to the Hirer with an understanding that the Hirer will pay agreed installments over a specified period of time.

The ownership of the asset will transfer to the hirer on the payment of all installments.

The Hirer will have the option of terminating the agreement any time before the transfer of ownership of assets. ( Cancellable Lease)

Hence Hire purchase is where a buyer cannot afford to pay the asked price as a lump sum but can afford to pay a percentage as a deposit, the contract allows the buyer to hire the goods for a monthly rent.

When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner.

If the buyer defaults in paying the instalments, the owner can repossess the goods which differentiates HP from other unsecured consumer credit systems and benefits the economy because markets can expand while minimising the seller's exposure to risk of default. Equally, HP is advantageous both to private consumers because it spreads the cost of expensive items over an extended time period, and to certain business consumers in that the balance sheet and taxation treatment of hire purchased goods differs from outright capital purchases. The need for HP is reduced when consumers have collateral or other forms of credit are readily available.

The asset is put on the balance sheet of the hirer, with a corresponding liability, and the hire installments are broken into principal and interest, with the latter being taken as the hire-vendor's income and the hirer's expense.

Hire vendor record it as receivables

Hire Purchase Financing Lease Financing

Hirer is entitled to claim Depreciation Tax Shield.

Lessee is not entitled to claim depreciation tax shield.

Hirer can charge only interest Portion.

Lessee can charge the entire lease payments as expense for tax computation.

Once the hirer has paid all instalments, he becomes the owner of the asset and can claim its salvage value.

Lessee does not become the owner of the asset. Therefore he has no claim over the asset salvage value.

Installment Sale is a credit sale and the legal ownership of the asset passes immediately to the buyer as soon as the agreement is made between the buyer and the seller.

Except for the timing of the transfer of ownership, installment sale and hire purchase are similar in nature.