HIRE PURCHASE OVERVIEWStarting any business involves a lot of financial planning for acquisition of fixed assets like land, plant, vehicles, machinery and many others. Most entrepreneurs are scared of lack of capital amount due to big amount of capital needed when a person started to create business. When large capital is involved in the business, an entrepreneur wishes to spread his cost of acquisition of fixed assets over a longer period. Longer period would reduce per year commitment towards the cost of assets. The intention is to match the commitment with the revenue generated per year so that the payments are easily manageable without any cash flow mismatch.This problems also faced by individuals who wishes wanted to buy a house or a car for their personal use. An individual may have a large commitment towards their family. They have to buy house where they need to stay, a vehicle for their transportation to go anywhere they have to go, and many other familys needs they have to consider. All of this needs a large amount of money in which most peoples cannot afford to settle them in a blink of eyes. Thus, they have to plan the best way to manage their financial in order to make their life better.One of the best ways to help financing goods is hire purchase. The core business of Hire Purchase is to provide financing for customer to buy private vehicles, private home appliances, business equipment and office machinery. Most of banks in Malaysia provide HP financing. HP financing involved the participations between three parties which are financier, dealer and customers.

DEFINITION OF HIRE PURCHASE HP is a legal term for a contract or an agreement, where the agreement includes a letting of goods with an option to purchase and an agreement for the purchase of the goods by instalments.

PARTIES INVOLVED IN HIRE PURCHASE1. Financier/Bank2. Customers3. DealersTYPES OF GOODS FINANCED1. Private car2. Private home appliances3. Business equipment4. Office machinery

HP TRANSACTION1. A hirer decided to purchase an asset (e.g : Buying a car)2. The hirer needs to pay a down payment to the dealer.3. The hirer then negotiates the amount of financing with their financier. The hirer needs to pay to the dealer whatever amount not beingn covered under the financing. The hirer and the owner (normally the financier) signed a hire purchase agreement.4. The owner gives the letter of undertaking to the dealer in order to release the goods (car) to the hirer.5. The dealer delivers the goods to the hirer upon receiving the letter of undertaking from the owner. The hirer receives the goods, inspects it and accepts it after being satisfied with the condition of the goods.6. The owner pays the balance to the dealer.7. The hirer will need to pay the monthly instalments to the owner/financier.

HP AGREEMENTHP agreement is done in writing and must be signed by the hirer and the financier. Normally a HP agreement will have the following information, as laid down in Section 4C of the Hire Purchase Act 1967.i. Description of the goods as would be sufficient to identify the goods.ii. Specify time period and when the period shall start.iii. The number of instalments and the time of payment.iv. The amount of instalmentsv. Specify the person to whom and the place at which the payments to be made.vi. The address where the goods to be located.vii. Cash price for the goods.viii. Hire Purchase price (The total sum that must be paid to hire and then the price to purchase the goods.)ix. Deposit amount (e.g : 10% of the actual price of the car is the amount of deposit that the hirer has to pay to the car dealer) x. A reasonably comprehensive statement of the parties right (sometimes including the right to cancel the agreement during cooling-off period).xi. The right of the hirer to terminate the contract when he has a valid response to do so.xii. A guarantor may be needed (based on the hirer credit assessment, the bank may require a guarantor as an additional security to support the hirers application. When the hirer is unable to pay the monthly payment, the guarantor will responsible to make the payment including the interest).xiii. Insurance coverage throughout the duration of the hire purchase agreement.

The following obligations have to be fulfilled by the hirer:

i. The hirer has to pay the hire instalments.ii. The hirer has to pay the overdue instalments (A penalty is imposed on overdue instalments when its interest charged on a daily basis. For fixed rate financing, the maximum charged allowed is 8% while for variable rate financing, it is 2% above the prevailing term charges for variable rate).iii. To take reasonable care of the goods.iv. To inform the owner where the goods will be kept.v. A hirer can sell the products if and only if he has purchased the goods.

The owner also has the right to terminate the agreement when the hirer breaches any terms the agreement of contract. Thus, the owner has the right:i. To forfeit the deposit.ii. To retain the instalments already paid and recover the balance due.iii. 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 instalments that have been paid by the hirer).iv. To claim damages for anyloss suffered

COMPUTATIONS OF HIRE PURCHASE1. Interest amount or also known as term charges (Total amount of interest needs to be paid for the loan).

Example : Encik Ali borrowed RM1k to purchase a second hand car. Bank A provided a loan. Encik Ali must repay the loan by monthly over one year. The interest is 14% per annum.

= RM1000 X 0.14 X 1 = RM140 per annum2. Monthly rental payment /instalment:

This refers to how much the amount of payment of the loan the hirer has to pay per month (including interest).

= (RM1000 + RM140) / 12 months= RM95In this case, Encik Ali has to pay RM95 to bank A as the monthly payment for his loan for a 12 months (a year).3. Statutory Rebate (SR)

Statutory rebate is the term used when you pay off a credit agreement before it is due to end. It entitles you to a proportionate rebate on the interest payable on the agreement. The law provides that borrowers can settle most agreements early, provided certain conditions are met. It is impossible for the hirer of a hire purchase loan to check the amount of statutory rebate he is entitled to because the calculation formula is not mentioned in the hire purchase agreement. Also, the description of the formula in the Hire Purchase Act 1967 is almost incomprehensible to the common man.The hirer is entitled to a statutory rebate for terms charges and unexpired insurance. The statutory rebate for terms charges is calculated using a formula derived from section 2(1) of the Act. Simplified, the formula is as below:

IX(N) (N+1)

(T) (T+1)

Where:I = amount of interest chargedN = number of installments still to goT = total number of installments in the agreement

Let say, Encik Abu bought a car.Car purchase price : RM100,000Deposit : RM10,000Loan Amount : RM90,000Interest :14% (flat rate)

Time period for payment of the loan : 5 years / 60 months

Encik Ali has to pay a total of 60 installments in a hire purchase agreement and he is charged an interest amount of RM45,000 (total interest for 60 months) for the whole period. She has already paid for 12 months before she decided to complete the purchaseearly statements. Thus, statutory rebate for term charges he is entitled is:RM45,000 x (48) (48+1)/(60) (60+1) = RM28,918.10

4. Annual Percentage Rate (APR)Basically, APR gives an idea of total hire purchase cost of the borrowing. APR, is the interest rate charged on the amount borrowed. It reflects the annual cost of borrowing money. APR makes it easier to compare different loans and credit cards, because you can easily see which loan/credit card would be cheaper. For example, a loan with a 10%interest rateis less expensive than a loan with a 15% interest rate.APR should be stated in HP agreement. The formula for APR is (refer to the seventh schedule of HP act)

Where:N = number of instalmentsC = number of instalments that are under the contract which will be paid in one year or, where the contract to be completed in less than one year, the number of instalments that would be paid in a year if instalments continued to be paid at the same interval.F = the amount determined in accordance with the formula:

T = Total amount of predetermined term chargesA = amount financed For example, take a look at Encik Ali case.F= (100(12) x 140) / 12 x 1000 = 14Thus, the annual percentage rate is:APR = = 336(3768)/(4032+46800) = 1,266,048/50,832 = 24.9065%

ISLAMIC CONCEPT

Al Ijarah Thumma al - Bai

Under the Al-Ijarah contract, the hirer (customer) hires the goods from the owner (the bank) at an agreed rental over a specified period. Within the hiring period, the hirer signs the leasing contract for the goods from the owner at an agreed price. During the period of the agreement, the bank owns the vehicle.Upon settlement of the hire rentals, the Sales Contract will be executed, thus transferring the ownership of the vehicle from the bank to the hirer.However, in the event of the customer failing to perform his obligation to service the hire rental or performs otherwise from the terms and conditions stated in the agreement, the bank has the right to exercise reasonable actions to mitigate its losses.

ADVANTAGES AND DISADVANTAGES OF HIRE PURCHASEAdvantages 1. Convenience in payment The buyer is greatly benefited as he has to make the payment in installments. This system is greatly advantageous to the people having limited income.

2. Increased Volume Of Sales: This system attracts more customers as the payment is to be made in easy installments. This leads to increased volume of sales.

3. Increased Profits: Large volume of sales ensures increased profits to the seller.

4. Encourages Savings: It encourages thrift among the buyers who are forced to save some portion of their income for the payment of the installments. This inculcates the habit to save among the people.

5. Helpful For Small Traders: This system is a blessing for the small manufacturers and traders. They can purchase machinery and other equipment on installment basis and in turn sell to the buyer charging full price.

6. Earning Of Interest: The seller gets the installment which includes original price and interest. The interest is calculated in advance and added in total installments to be paid by the buyer.

7. Lesser Risk: From the point of view of seller this system is greatly beneficial as he knows that if the buyer fails to pay one installment, he can get the article back.

Disadvantages.1. Higher Price: A buyer has to pay higher price for the article purchased which includes cost plus interest. The rate of interest is quite high.

2. Artificial Demand: Hire purchase system creates artificial demand for the product. The buyer is tempted to purchase the products, even if he does not need or afford to buy the product.

3. Heavy Risk: The seller runs a heavy risk under such system, though he has the right to take back the articles from the defaulting customers. The second hand goods fetch little price.

4. Difficulties in Recovery of Installments: It has been observed that the sellers do not get the installments from the purchasers on time. They may choose wrong buyers which may put them in trouble. They have to waste time and incur extra expenditure for the recovery of the installments. This sometimes led to serious conflicts between the buyers and the sellers.

5. Break Up Of Families: The system puts a great financial burden on the families which cannot afford to buy costly and luxurious items. Recent studies in western countries have revealed that thousands of happy homes and families have been broken by hire purchase buyings.

REFERENCES1. www.bankinginfo.com.my/02_know_your_products/0202_applying_for_loan/hire_purchase.php2. www.rhb.com.my/loans/hire-purchase/hp_hire_main.html3. http://www.ask.com/business-finance/types-hire-purchases-a183ac0c3f79e5d0#4. http://www.akpk.org.my/learning/articles-and-tips/id/223/hire-purchase-loan5. http://www.tradingstandards.gov.uk/cgi-bin/brighton-hove/con1item.cgi?file=*adv0030-1011.txt6. http://www.calculator.com.my/car-loan#.VSibhvmUdCo7. http://credit.about.com/od/glossary/g/apr.htm?utm_term=annual%20percentage%20rate&utm_content=p1-main-1-title&utm_medium=sem&utm_source=msn&utm_campaign=adid-199d47ef-9829-49d8-9031-e1e7286076f9-0-ab_msp_ocode-4609&ad=semD&an=msn_s&am=phrase&q=annual%20percentage%20rate&dqi=&o=4609&l=sem&qsrc=999&askid=199d47ef-9829-49d8-9031-e1e7286076f9-0-ab_msp8. http://www.efinancemanagement.com/sources-of-finance/difference-between-lease-financing-vs-hire-purchase9. http://www.yourarticlelibrary.com/stores/hire-purchase-system-its-advantages-and-disadvantages/25917/