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Ahire purchase (HP),[1] also known as aninstallment plan, is an arrangement whereby a customer agrees to a contract to acquire an asset by paying an initial installment (e.g., 40% of the total) and repaying the balance of the price of the asset plus interest over a period of time. Other analogous practices are described asclosed-end leasing orrent-to-own.
The hire purchase agreement was developed in theUnited Kingdom in the 19th century to allow customers with a cash shortage to make an expensive purchase they otherwise would have to delay or forgo. For example, in cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as adeposit, a hire-purchase contract allows the buyer to hire the goods for a monthlyrent. 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 installments, the owner may repossess the goods, a vendor protection not available with unsecured-consumer-credit systems. HP is frequently advantageous to consumers because it spreads the cost of expensive items over an extended time period. Business consumers may find the differentbalance sheet andtaxation treatment of hire-purchased goods beneficial to their taxable income. The need for HP is reduced when consumers have collateral or other forms of credit readily available, such ascredit cards.
These contracts are most commonly used for items such as automobiles and high-value electrical goods where the purchasers are unable to pay for the goods directly.
To be valid, HP agreements must be in writing and signed by bothparties. They must clearly lay out the following information in a print that all can read without effort:
If the seller has the resources and the legal right to sell the goods on credit (which usually depends on a licensing system in most countries), the seller and the owner will be the same person. But most sellers prefer to receive a cash payment immediately. To achieve this, the seller transfers ownership of the goods to a Finance Company, usually at a discounted price, and it is this company that hires and sells the goods to the buyer. This introduction of a third party complicates the transaction. Suppose that the seller makes false claims as to the quality and reliability of the goods that induce the buyer to "buy". In a conventional contract of sale, the seller will be liable to the buyer if these representations prove false. But in this instance, the seller who makes the representation is not the owner who sells the goods to the buyer only after all the installments have been paid. To combat this, some jurisdictions, includingIreland, make the seller and the finance house jointly and severally liable to answer for breaches of the purchase contract.
The extent to which buyers are protected varies from jurisdiction to jurisdiction, but the following are usually present:
The hirer usually has the following rights:
Each jurisdiction has a different formula for calculating the amount of the rebate. Generally, returning the goods is subject to the payment of a penalty to reflect the owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value.
The hirer usually has the following obligations:
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 the agreement. This entitles the owner:
Hire purchases are commonly used by businesses (includingcompanies,partnerships andsole traders) inAustralia to fund the purchase ofcars,commercial vehicles and other business equipment.
UnderAustralian Taxation Office rules, businesses who account forGST on anaccruals basis are entitled to claim anInput Tax Credit for all of theGST contained in the purchase price of the goods on their nextBusiness Activity Statement.
Hire purchase is also commonly known ascommercial hire purchase andcorporate hire purchase (both abbreviated toCHP) in Australia.Hire Purchase was brought to Australia in the early 1960s by Les Meteyard and his business partner (currently unknown).
Hire purchases agreement are commonly known as H.P agreement inMalaysia and it is used byfinancial institutions inMalaysia to fund the purchase of consumer goods,vehicles and other business equipment and industrial machinery.
InMalaysia, the legislation governing hire purchase transactions is the Hire Purchase Act 1967, which came into force on 11 April 1968 after hire purchase became popular in the acquisition of expensive consumer goods such ascars, business equipment and industrial machinery. Purchasingcars is the most common type of hire purchase agreement inMalaysia and the repayment could take up to 9 years from the date of agreement been executed.
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