Hire purchase comprehensive review

Hire purchase (frequently abbreviated to HP) is the legal term for a contract developed in the United Kingdom, and now found in India, Australia, New Zealand, and other states which have adopted the English law concept. (In North America, where the word hire most commonly refers to employment, the comparable system is called closed-end leasing.) In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. In the United States, a hire purchase is termed an installment plan; other analogous practices are described as closed-end leasing or rent to own.

Hire purchase differs from a mortgage and similar forms of lien-secured credit in that the so-called buyer who has the use of the goods is not the legal owner during the term of the hire-purchase contract. If the buyer defaults in paying the installments, the owner may repossess the goods, a vendor protection not available with unsecured-consumer-credit systems. HP is frequently advantageous to consumers because it spreads the cost of expensive items over an extended time period. Business consumers may find the different balance sheet and taxation treatment of hire-purchased goods beneficial to their taxable income. The need for HP is reduced when consumers have collateral or other forms of credit readily available.

This article describes principles common to the different state laws. For a detailed explanation, readers should refer to the law operating in the jurisdiction in which any proposed transaction is to take place and/or seek professional advice.

Standard provisions

To be valid, HP agreements must be in writing and signed by both parties. They must clearly set out the following information in a print that all can read without effort:

1. a clear description of the goods
2. the cash price for the goods
3. the HP price, i.e., the total sum that must be paid to hire and then purchase the goods
4. the deposit
5. the monthly instalments (most states require that the applicable interest rate is disclosed and regulate the rates and charges that can be applied in HP transactions) and
6. a reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period).
7.The right of the hirer to terminate the contract when he feels like doing so.

The seller and the owner

If the seller has the resources and the legal right to sell the goods on credit (which usually depends on a licensing system in most countries), the seller and the owner will be the same person. But most sellers prefer to receive a cash payment immediately. To achieve this, the seller transfers ownership of the goods to a Finance Company, usually at a discounted price, and it is this company that hires and sells the goods to the buyer. This introduction of a third party complicates the transaction. Suppose that the seller makes false claims as to the quality and reliability of the goods that induce the buyer to "buy". In a conventional contract of sale, the seller will be liable to the buyer if these representations prove false. But, in this instance, the seller who makes the representation is not the owner who sells the good to the buyer only after all the instalments have been paid.

The hirer's rights

The hirer usually has the following rights:

1. To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate (each state has a different formula for calculating the amount of this rebate)
2. To return the goods to the buyer — this is subject to the payment of a penalty to reflect the owner's loss of profit but subject to a maximum specified in each state's law to strike a balance between the need for the buyer to minimise liability and the fact that the owner now has possession of an obsolescent asset of reduced value
3. With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has a good credit rating
4.Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost.

The owner's rights

The owner usually has the right to terminate the agreement where the hirer defaults in paying the instalments or breaches any of the other terms in the agreement. This entitles the owner:

1. to forfeit the deposit
2. to retain the instalments already paid and recover the balance due
3. to repossess the goods (which may have to be by application to a Court depending on the nature of the goods and the percentage of the total price paid)
4.to claim damages for any loss suffered.

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