What Is Hire Purchase System? What Are Its Characteristics?

Hire Purchase Systemis a special system of purchase and sale. When goods are purchased on hire-purchase system, purchaser pays the price in installments, these installments may be Monthly, Quarterly or Yearly etc. Goods are delivered to the purchaser at the time of Hire Purchase Agreement but purchaser will become the owner of goods only on the payment of the last installments. All the installments paid are treated as hire till the last installment is paid off.

Under the Hire-purchase system, goods are delivered to a person who agrees to pay the owner by equal periodical installments, such installments are to be treated as hire of these goods until a certain fixed amount has been paid, when these goods become the property of the hire.

Hire Purchase Agreement:

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Hire purchase agreement means an agreement under the which goods are let on hire and under which the hire has an option to purchase them in accordance with the terms of the agreement and includes the agreement under which:

1. Possession of goods is delivered by the owner thereof to a person or condition that such person pays the agreed amount in periodical installments.

2. The property in the goods is to pass to such a person on the payment of the last installment and

3. Such a person has a right to terminate the agreement at any time before the property so passes.  Every Hire Purchase Agreement shall be in writing and signed by all the parties thereto.

Characteristics of Hire Purchase System

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1. Goods are delivered by the seller to the buyer.

2. Buyer agrees to pay hire purchase price (i.e., cash price + interest) in

3. Instalments paid are treated as hire charges till the payment of the last instalment.

4. After the payment of the last instalment, ownership is transferred in the name of the buyer.

5. In the case of default, in the payment by the buyer, the seller has got a right to repossess the goods, as ownership lies with the seller, till the payment of last installment.

Transactions with above mentioned features are called hire purchase transactions because of hire purchase nature of these transactions.

Term Used in Hire Purchase agreement:

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  1. Hire Purchaser: He is buyer in hire purchase agreement.
  2. Hire Vendor: He is seller in a hire purchase agreement.
  3. Cash Price: It is the amount to be paid for outright purchase in cash.
  4. Down Payment: It is the of initial payment payable by the hire purchaser at the time of entering into a hire purchase agreement.
  5. Hire Purchase Price: It is the total amount payable by the hire purchaseres to the hire vendor of goods are purchased under the hire purchase system.
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