UNIT 5FINANCIAL SERVICESHire Purchase

Dr. Thulasi Krishna. K

DEFINITION

Hire purchase is a method of financing of the fixed asset to be purchased on future date.

Under this method of financing, the purchase price is paid in installments. Ownership of the asset is transferred after the payment of the last installment.

FEATURES

The main features of hire purchase finance are: The hire purchaser becomes the owner of the asset after paying the last

installment. Every installment is treated as hire charge for using the asset. Hire purchaser can use the asset right after making the agreement with the hire

vendor. The hire vendor has the right to repossess the asset in case of difficulties in

obtaining the payment of installment.

ADVANTAGES

Financing of an asset through hire purchase is very easy. Hire purchaser becomes the owner of the asset in future. Hire purchaser gets the benefit of depreciation on asset hired by him/her. Hire purchasers also enjoy the tax benefit on the interest payable by

them.

DISADVANTAGES

Ownership of asset is transferred only after the payment of the last installment.

The magnitude of funds involved in hire purchase are very small and only small types of assets like office equipment’s, automobiles, etc., are purchased through it.

The cost of financing through hire purchase is very high.

PROCEDURE

Hire purchase agreement is required which usually consists of: The hire purchase price of the goods to which the agreement relates; The cash price of the goods, that is to say, the price at which the good is purchased for cash; The date of the commencement of the agreement; The number and time interval of installments by which the hire purchase price is to be paid; The name of goods, with its sufficient identity, to which the hire purchase agreement relates

to; The amount to be paid, if any, at the time of signing the agreement (down payment); The signatures of the parties involved in transaction.

LEASE

Lease is a financial contract between the business customer (user) and the equipment supplier (normally owner) for using a particular asset/equipment over a period of time against the periodic payments called “Lease rentals”.

The lease generally involves two parties i.e. the lessor (owner) and the lessee (user). Under this arrangement, the lessor transfers the right to use to the lessee in return of the lease rentals agreed upon.

TYPES OF LEASE

i. Finance Lease [all the risks and rewards of ownership of assets are transferred to the lessee for lease rentals]

ii. Operating Lease [Risks and rewards are not transferred] iii. Sale And Lease Back Iv. Direct Lease V. Domestic and International Lease