Hire Purchase

Hire purchase is an agreement to the sale of an asset subject to the following conditions: the goods are delivered at the beginning of the agreement on the basis that the hirer will pay an agreed amount in periodical installments mutually agreed upon; after the last installment is paid, the title of ownership will pass to the hirer; the hirer can terminate the agreement by paying all the balance installments and taking the title of the asset. The Hire Purchase Act 1972 defines a hire purchase agreement as “an agreement under which goods are let on hire and under which the hirer has on option to purchase them in accordance with the terms of the agreement and includes an agreement under which

1. Possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical installments
2. The property in the good is to pass to such persons on the payment of the last of such installments and that such person pays the agreed amount in periodical installments and

3. Such person has a right to terminate the agreement at any time before the property passes.

Salient Features of Hire/Purchase:

1. The hire purchases the equipment from the equipment supplier and lets it on hire to the hirer.
2. The hirer is required to pay, hire/purchase installments over a specified period of time. The hire/purchase installments are payable monthly in advance.
3. The ownership of the asset is transferred after the hirer has paid the last installment.
4. Each installment is treated as hire charge so that if default is made in payment of any one installment, the seller is entitled to take away the goods.
5. The terms and conditions relating to the usage of the asset, namely its maintenance insurance etc and the rights and obligations of the parties to the agreement are described in the hire/purchase agreement.

Hire /Purchase in India:

Hire/purchase has been in operation in India for an appreciable period of time. The first hire/purchase companies in India were the commercial Credit Corporation Ltd and Motor and General Finance Ltd which were set up in the beginning of this century to finance the transport sector. Vehicle financing is broadly categorized into motors cars and trucks. Leading truck financers are Ashok Leyland Finance Co., SR Truck Finance etc. Amongst the motor car finance companies the leaders are Kotak Mahindra, Escorts Financial Services and Citi Mobile Finance. Presently Hire/purchase transactions are done on a large scale by finance companies. Certain private banks and foreign banks have also entered this field through establishment of subsidiaries. Hire/ purchase is a preferred transaction for banks as it is a superior method than hypothecation. Banks are better placed in recovery of vehicle advances and borrowers would be benefited as more credit would be made available


The main advantages of hire/purchase to a company are:

1. Higher rate of interest can be charged and as the calculation is on the original advance, higher income would be realized.
2. As the company is the owner, attachment of the vehicle and subsequent sale even by private auction would keep the NPAs low.
3. As the borrowers would end up losing the installments paid as well as the vehicle, defaults would be lower.
4. The banks can effectively recycle the funds recovered.

Leasing Versus Hire/Purchase:

From the hiree’s point of view, the following can be cited as differences between leasing and hire/purchase:


1. Tax shields on depreciation and investment allowance cannot be claimed by the lessee.
2. The entire lease rental is a tax deductible expense.
3. The lessee, not being the owner of the asset, does not enjoy the salvage value of the asset.

Hire/ Purchase:

1. Tax shields on depreciation and investment allowance can be claimed by the hirer.
2. Only the interest components of the hire/purchase installments tax deductible.

3. The hirer being the owner of the asset enjoys the salvage value of the asset.