A hire purchase (HP),
also known as an installment 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 as
closed-end leasing or
rent to own
Rent-to-own, also known as rental purchase or rent-to-buy, is a type of legally documented transaction under which tangible property, such as furniture, consumer electronics, motor vehicles, home appliances, real property, and engagement rin ...
.
In other words installment means to let a thing without giving total price while payment will be given in a given time period.
The buyer will pay monthly agreement installment.
The hire purchase agreement was developed in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the European mainland, continental mainland. It comprises England, Scotlan ...
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 a
deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly
rent
Rent may refer to:
Economics
*Renting, an agreement where a payment is made for the temporary use of a good, service or property
*Economic rent, any payment in excess of the cost of production
*Rent-seeking, attempting to increase one's share of e ...
. 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 different
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a Partnersh ...
and
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
ation 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 as
credit card
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...
s.
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.
Standard provisions
To be valid, HP agreements must be in writing and signed by both
parties
A party is a gathering of people who have been invited by a host for the purposes of socializing, conversation, recreation, or as part of a festival or other commemoration or celebration of a special occasion. A party will often feature ...
. They must clearly lay out the following information in a print that all can read without effort:
#a clear description of the goods
#the cash price for the goods
#the HP price (i.e., the total sum that must be paid to hire and then purchase the goods)
#the deposit
#the monthly installments (most states require that the applicable interest rate is disclosed and regulate the rates and charges that can be applied in HP transactions)
#a reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period)
# The right of the hirer to terminate the contract when he feels like doing so with a valid reason
The seller and the owner
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, including
Ireland
Ireland ( ; ga, Éire ; Ulster Scots dialect, Ulster-Scots: ) is an island in the Atlantic Ocean, North Atlantic Ocean, in Northwestern Europe, north-western Europe. It is separated from Great Britain to its east by the North Channel (Grea ...
, make the seller and the finance house jointly and severally liable to answer for breaches of the purchase contract.
Implied warranties and conditions to protect the hirer
The extent to which buyers are protected varies from jurisdiction to jurisdiction, but the following are usually present:
#the hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will interfere with the hirer's possession during the term of this contract
#the owner will be able to pass
title
A title is one or more words used before or after a person's name, in certain contexts. It may signify either generation, an official position, or a professional or academic qualification. In some languages, titles may be inserted between the f ...
to, or ownership of, the goods when the contract requires it
#that the goods are of merchantable quality and fit for their purpose, save that exclusion clauses may, to a greater or lesser extent, limit the Finance Company's liability
#where the goods are let by reference to a description or to a sample, what is actually supplied must correspond with the description and the sample.
The hirer's rights
The hirer usually has the following rights:
#To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate
#To return the goods to the owner
#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.
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's obligations
The hirer usually has the following obligations:
#to pay the hire installment
#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 installments and if appropriate, recompense the owner for any loss in asset value)
#to inform the owner where the goods will be kept.
#A hirer can sell the products if, and only if, he/she has purchased the goods finally or else not to any other third party.
The owner's rights
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:
#to forfeit the deposit
#to retain the installments 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
In Australia
Hire purchases are commonly used by businesses (including
companies
A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...
,
partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments ...
s and
sole trader
A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole ...
s) in
Australia to fund the purchase of
cars
A car or automobile is a motor vehicle with wheels. Most definitions of ''cars'' say that they run primarily on roads, Car seat, seat one to eight people, have four wheels, and mainly transport private transport#Personal transport, people in ...
,
commercial vehicles
A commercial vehicle is any type of motor vehicle used for transporting goods or paying passengers.
The United States defines a "commercial motor vehicle" as any self-propelled or towed vehicle used on a public highway in interstate commerce to t ...
and other business equipment.
Under
Australian Taxation Office
The Australian Taxation Office (ATO) is an Australian statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system, superannuatio ...
rules, businesses who account for
GST GST may refer to:
Taxes
* General sales tax
* Goods and Services Tax, the name for the value-added tax in several jurisdictions:
** Goods and services tax (Australia)
** Goods and Services Tax (Canada)
** Goods and Services Tax (Hong Kong)
**G ...
on an
accruals basis are entitled to claim an
Input Tax Credit for all of the
GST GST may refer to:
Taxes
* General sales tax
* Goods and Services Tax, the name for the value-added tax in several jurisdictions:
** Goods and services tax (Australia)
** Goods and Services Tax (Canada)
** Goods and Services Tax (Hong Kong)
**G ...
contained in the purchase price of the goods on their next
Business Activity Statement.
Hire purchase is also commonly known as ''commercial hire purchase'' and ''corporate hire purchase'' (both abbreviated to ''CHP'') in Australia.
Hire Purchase was brought to Australia in the early 1960s by Les Meteyard and his business partner (currently unknown).
In Malaysia
Hire purchases agreement are commonly known as H.P agreement in
Malaysia
Malaysia ( ; ) is a country in Southeast Asia. The federation, federal constitutional monarchy consists of States and federal territories of Malaysia, thirteen states and three federal territories, separated by the South China Sea into two r ...
and it is used by
financial institutions
Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...
in
Malaysia
Malaysia ( ; ) is a country in Southeast Asia. The federation, federal constitutional monarchy consists of States and federal territories of Malaysia, thirteen states and three federal territories, separated by the South China Sea into two r ...
to fund the purchase of consumer goods,
vehicles
A vehicle (from la, vehiculum) is a machine that transports people or cargo. Vehicles include wagons, bicycles, motor vehicles (motorcycles, cars, trucks, buses, mobility scooters for disabled people), railed vehicles (trains, trams), ...
and other business equipment and industrial machinery.
In
Malaysia
Malaysia ( ; ) is a country in Southeast Asia. The federation, federal constitutional monarchy consists of States and federal territories of Malaysia, thirteen states and three federal territories, separated by the South China Sea into two r ...
, 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 as
cars
A car or automobile is a motor vehicle with wheels. Most definitions of ''cars'' say that they run primarily on roads, Car seat, seat one to eight people, have four wheels, and mainly transport private transport#Personal transport, people in ...
, business equipment and industrial machinery. Purchasing
cars
A car or automobile is a motor vehicle with wheels. Most definitions of ''cars'' say that they run primarily on roads, Car seat, seat one to eight people, have four wheels, and mainly transport private transport#Personal transport, people in ...
is the most common type of hire purchase agreement in
Malaysia
Malaysia ( ; ) is a country in Southeast Asia. The federation, federal constitutional monarchy consists of States and federal territories of Malaysia, thirteen states and three federal territories, separated by the South China Sea into two r ...
and the repayment could take up to 9 years from the date of agreement been executed.
See also
*
Buy now, pay later
Buy now, pay later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them at a future date. BNPL is generally structured like an installment plan money lending process that involves consumers, financiers, ...
*
Chattel mortgage
Chattel mortgage, sometimes abbreviated ''CM'', is the legal term for a type of loan contract used in some states with legal systems derived from English law.
Under a typical chattel mortgage, the purchaser borrows funds for the purchase of mov ...
*
Closed-end leasing
*
Layaway
Layaway ('' lay-by'' in Australia, New Zealand, and South Africa) is a purchase agreement in which the seller reserves an item for a consumer until the consumer completes all the payments necessary to pay for that item, and only then hands over the ...
*
Leasing
*
Personal contract purchase
Personal contract purchase (PCP), often referred to as a personal contract plan, is a form of hire purchase vehicle finance for individual purchasers, to both personal contract hire and a traditional hire purchase (buying on installments).
Unlik ...
*
Rent-to-own
*
Vehicle leasing
A vehicle (from la, vehiculum) is a machine that transports people or cargo. Vehicles include wagons, bicycles, motor vehicles (motorcycles, cars, trucks, buses, mobility scooters for disabled people), railed vehicles (trains, trams), wate ...
References
External links
*
{{Authority control
Contract law
Sales
Renting