Hire-Purchase

What Is A Hire-Purchase Agreement

In a hire-purchase agreement, the owner hires goods to the hirer with an option to purchase the goods when he has made the payment of a certain sum.

By this system, the purchaser who is unable to pay the full price of the asset at one lump sum, gets facilities to acquire an asset and after making the payment of an initial amount called premium, the purchaser pays the balance consideration money in installments.

After the payment of all the installments, the property in the goods passes to the hirer.

The hirer has an option to return the goods during the period of hire. In a hire-purchase agreement, the hirer has the right to terminate the agreement for hire at his pleasure and is not bound to pay the value of the goods.

A hire-purchase agreement is a form of bailment; the hirer is given the right to purchase the goods on certain conditions. That, however, is an option not an obligation to purchase.

The hirer may elect to purchase the goods and when he does so, after he fulfills all the conditions prescribed in the agreement, the title to the goods will pass to him. But he may elect not to do so, and in that event he is entitled to return the goods and terminate the agreement in the manner provided therein.

Forms Of Hire Purchase Agreements

Hire-purchase agreements are of two forms.

1. In the first form the goods are purchased by the financier from the dealer and
   • The financier obtains a hire-purchase agreement from the customer,
   • Under which the customer becomes the owner of the goods
   • On payment of all the installments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price.
   • The owner gets his money from the financier, who recovers the cost from the customer.
2. In other form
   • The customer purchases the goods and he executes a hire-purchase agreement with a financier,
   • Under which he remains in possession of goods, subject to payment of amount paid by the financier on his behalf to the owner.
   • The financier gets a right to seize the goods in the event of non-fulfillment of conditions of hire-purchase agreement by the customer.

Nature Of Agreement

The true nature of the transaction is determined from the terms of the agreement and the court unless prohibited by statute can go behind the documents to determine the true nature of the transaction.

If the purchaser desiring to purchase the goods, who is not having sufficient money for purchasing the same, borrows the amount from a third party and pays it over to the vendor, the transaction between the customer and the third party will be a loan transaction.

The true nature of the transaction will not change if the lender himself is owner of the goods and he accepts the promise by the purchaser to pay the balance money due against delivery of goods.