Hire purchase(frequently abbreviated to
HP) is the legal term for a contract developed in the United Kingdom, and now found in India, Australia and New Zealand. It is also called
closed-end leasingClosed-end leasing is a contract-based system governed by law in the U.S. and Canada. It allows a person the use of property for a fixed term, and the right to buy that property for the agreed residual value when the term expires....
. 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
rentRenting is an agreement where a payment is made for the temporary use of a good, service or property owned by another person or company. The owner of the good, service or property may be referred to as the lessor and the party paying to use the property as the lessee or renter...
.
Hire purchase(frequently abbreviated to
HP) is the legal term for a contract developed in the United Kingdom, and now found in India, Australia and New Zealand. It is also called
closed-end leasingClosed-end leasing is a contract-based system governed by law in the U.S. and Canada. It allows a person the use of property for a fixed term, and the right to buy that property for the agreed residual value when the term expires....
. 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
rentRenting is an agreement where a payment is made for the temporary use of a good, service or property owned by another person or company. The owner of the good, service or property may be referred to as the lessor and the party paying to use the property as the lessee or renter...
. 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. In Canada and the United States, a hire purchase is termed an
installment plan; other analogous practices are described as
closed-end leasingClosed-end leasing is a contract-based system governed by law in the U.S. and Canada. It allows a person the use of property for a fixed term, and the right to buy that property for the agreed residual value when the term expires....
or
rent to ownRent-to-own is an informal term for a type of retail storefront businesses which rents assets or items, most typically furniture or home appliances, with the condition that the item will be owned by the renter if the term of rent is finished, or that the lease can be converted to a sale for a...
.
Hire purchase differs from a
mortgageA mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt...
and similar forms of
lienIn law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
-secured credit in that the so-called buyer who has the use of the goods is not the legal owner during the term of the hire-purchase contract.
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 sheetIn financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a...
and
taxationTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law.Taxes are also imposed by many subnational entities...
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.
Standard provisions
To be valid, HP agreements must be in writing and signed by both
partiesA party is a person or group of persons that compose a single entity which can be identified as one for the purposes of the law.Courts use various terms to identify the role of a particular party in civil litigation, usually identifying the party that brings a lawsuit as the plaintiff, or, in older...
. They must clearly set 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) and
- 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 good to the buyer only after all the instalments have been paid. To combat this, some jurisdictions, including
IrelandIreland is a country in north-western Europe. The modern sovereign state occupies about five-sixths of the island of Ireland, which was partitioned on 3 May 1921. It is a parliamentary democracy and a republic...
, 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
Title is a legal term for a bundle of rights in a piece of property in which a party may own either a legal interest or an equitable interest The rights in the bundle may be separated and held by different parties. It may also refer to a formal document that serves as evidence of ownership...
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 (each jurisdiction has a different formula for calculating the amount of this rebate)
- To return the goods to the owner — this 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
- 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.
Basically hirer have following rights-
1-Rights of protection
2-Rights of notice
3-Rights of repossesion
4-Rights of Statement
5-Rights of excess amount
The hirer's obligations
The hirer usually has the following obligations:
- to pay the hire installments
- 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, compensate the owner for any loss in asset value)
- to inform the owner where the goods will be kept.
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.
Hire purchase in Australia
Hire purchasesHire purchase is the legal term for a contract developed in the United Kingdom, and now found in India, Australia and New Zealand. It is also called closed-end leasing...
are commonly used by businesses (including
companiesA company is a form of business organization.In the United States, a company is a corporation—or, less commonly, an association, partnership, or union—that carries on an industrial enterprise." Generally, a company may be a "corporation, partnership, association, joint-stock company,...
,
partnershipsA partnership is a type of business entity in which partners share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the...
and sole traders) in
AustraliaAustralia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the continental mainland , the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans...
to fund the purchase of
carsCARS is a four-letter acronym that can stand for:* Cable television relay service station* Canadian Aviation Regulations* Car Allowance Rebate System, a consumer Assistance to Recycle and Save Program, Title XIII of Supplemental Appropriations Act, 2009, more commonly known as "Cash for Clunkers."*...
, commercial vehicles and other business equipment.
Under
Australian Taxation OfficeThe Australian Taxation Office is the principal revenue collection agency for the Australian Government, in charge of administering the Australian taxation system. The Australian Taxation Office is not a legal entity...
rules, businesses who account for
GSTThe GST is a value added tax of 10% on most goods and services transactions in Australia.It was introduced by the Howard Government on 1 July 2000, replacing the previous Federal wholesale sales tax system and designed to phase out a number of various State and Territory Government taxes, duties...
on a accruals basis are entitled to claim an Input Tax Credit for all of the
GSTThe GST is a value added tax of 10% on most goods and services transactions in Australia.It was introduced by the Howard Government on 1 July 2000, replacing the previous Federal wholesale sales tax system and designed to phase out a number of various State and Territory Government taxes, duties...
contained in the purchase price of the goods on their next
Business Activity StatementThe Business Activity Statement is a form submitted to the Australian Taxation Office by all businesses to report their taxation obligations....
.
Hire purchase is also commonly known as
commercial hire purchase and
corporate hire purchase (both abbreviated to
CHP) in Australia.
See also
- Closed-end leasing
Closed-end leasing is a contract-based system governed by law in the U.S. and Canada. It allows a person the use of property for a fixed term, and the right to buy that property for the agreed residual value when the term expires....
- Installment plan
- Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets...
- Business Contract Hire
Business Contract hire is a term used in the UK to describe a vehicle operating lease used by a business. Contracts range from 24-60 months and are tailored to the businesses requirements....
- Chattel mortgage
Chattel mortgage is the legal term for a type of loan contract used in some states which have adopted the English law concept....
External links
- Hire purchase contracts explained by the New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses , and numerous smaller islands, most notably Stewart Island/Rakiura and the Chatham Islands. The indigenous Māori named New Zealand Aotearoa, commonly translated as The Land of the Long White Cloud...
Ministry of Consumer Affairs
- Hire purchase explained by the BBC
The British Broadcasting Corporation, usually referred to by its abbreviation as the "BBC", is the longest established and largest broadcaster in the world...