HIRE-PURCHASE - 2

Modus Operandi

The modus operandi of a hire purchase transaction is as follows:

The finance (hire purchase) company purchases the equipment from the supplier and gives it on hire.

The hirer is required to make a down payment of 20-25% of the cost and pay the balance amount along with the interest in EMI, in advance or arrears over a time span of 36-48 months.

Alternately, instead of the down payment, the hirer has to deposit an equal amount as a fixed deposit with the finance company which provides the entire finance on hire purchase terms, repayable with interest in EMIs over 36-48 months.

Deposit and the accumulated interest is returned to the hirer upon payment of the last installment.

The interest on each hire purchase installment is computed on the basis of flat rate of interest and the effective rate of interest is applied to the declining balance of the original loan amount to determine the interest component of installment. For a given flat rate of interest, the equivalent effective rate of interest is higher.

Hire Purchase Vs Installment Payment System

Hire Purchase Installment Payment System

Sale SaleThe hirer has the option to purchase The sale has already taken place, the the goods anytime during the term of goods have already been delivered to the agreement. He also has the right to the owner and the buyer is bound toto terminate the agreement at anytime pay the full price.before payment of the last installment.

Ownership OwnershipOwnership is passed to the hirer only Ownership is transferred to theif he exercises the option to purchaser on payment of the purchase. first installment.

Hire Purchase Vs Lease Financing

Hire Purchase Lease Financing

Ownership OwnershipThe ownership of the equipment The lessor company is the ownerpasses to the hirer on payment and the lessee is entitled only toof the last installment. the use of the leased equipment.

Depreciation Depreciation The hirer is entitled to the Depreciation on the asset is charged in depreciation shield on the assets the books of the lessor.hired by him.

Tax Benefits Tax BenefitsHirer is allowed the depreciation claim The lessor is allowed to claimand finance charge and the seller may depreciation and lessee is allowed to claim any interest on borrowed funds to claim rentals and maintenance costacquire the asset for tax purposes. Against taxable income.

Maintenance MaintenanceCost of maintaining the hired Maintenance of the leased asset is theequipment is to be borne by the responsibility of the lesse.hirer itself.

Extent Extent 20-25% of the cost of the equipment No down payment is required from the is required to be paid by the hirer as down lessee.payment. Magnitude MagnitudeThe magnitude of funds involved is The magnitude of funds involved is relatively low. very large.

Subjects of hire purchase Subject of Lease Financing Automobiles, generators, Aircrafts, ships, machinery are taken office equipment etc. are usually on financial lease.hire purchased.