Meaning and Characteristics Hire-purchase is a mode of financing the price of the goods to be sold on a future date. In a hire purchase transaction, the goods are on hire, the purchase price in installments hirer is allowed an option to purchase the goods by paying all the installment. A hire purchase agreement is defined as peculiar kind of transaction in which the on hire with an option to the hirer to purchase them, with the following stipulations:
(a) Payment has to be made in installments over a specified period:
(b) The possession is delivered to the hire at the time of entering into the contract;
(c) The property in the goods passes to the hire on payment of the last installment;
(d) Each installment is treated as hire charges so that if a default is made in payment of any seller becomes entitled to take away the goods and,
(e) The higher purchaser is free to return the goods without being required to pay any further tents falling due after the return.
The modus operandi of a hire purchase transaction is structured around the following features: (hire purchase) company purchases the equipment from the equipment supplier hire to the hirer who is required to make a down payment of 20 - 25 per cent of the the balance with interest in Equated Monthly Instalments (EMI), in advance or dover, 36 -48 months. Alternatively, in place of the margin in the down payment a deposit-linked plan, the hire has to put in an equal amount as fixed deposit with company, which provides the entire finance, on hire purchase terms, reparable with EMIs over 36 - 48 months. The deposit together with the accumulated interest is hire after the payment of the last installment. The interest component of each hire computed on the basis of a flat rate of Interest and the effective rate of applied to declining balance of the original loan amount to determine the interest component of installment. For a given rate of interest the equivalent effective rate of interest is higher. The computation of the effective rate of interest is during the hire period (period of agree installment contacts, the hire option for an early repayment and repurchase the remaining installments (not fallen due) minus an interest rebate.