What is hire-purchase?
Hire purchase is a type of installment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase.
- Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last installment is paid.
- The hire purchase system is regulated by the Hire Purchase Act 1972.
- Hire purchase should be distinguished from installment sale wherein title to the property passes to the purchaser with the payment of the first installment itself.
Leasing and Hire-Purchase: Comparison
- These two are technically different instruments, however, income-tax and sales-tax treatment apart, there is not much difference between lease and hire-purchase.
- Historically, leasing has been used mostly for plant and machinery, while hire-purchase has commonly been used for vehicles.
- The RBI treats lease and hire-purchase at par and has stopped giving a distinctive classification to leasing and hire-purchase companies.