Hire Purchase of Financial Services

7/30/2019 Hire Purchase of Financial Services

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HIRE PURCHASE FINANCE

AND CONSUMER CREDIT

CHAPTER 5

M Y KHAN - Financial Services


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Hire Purchase Finance -

Meaning

Payment of Periodic instalments

Immediate possession of goods by the buyer

Ownership of goods with vendor until fulland final payment

Vendors right to repossess the goods in

case of default by buyer Treatment of instalment as a hire charge till

the payment of last instalment.


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Hire purchase - definition

An agreement under which goods are

let on hire and under which the hirer

has an option to purchase them inaccordance with the terms of the

agreement.


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Rights of the Hirer

Right of Protection

Right of Notice

Right of Repossession

Right of Statement

Right to Excess

Amount


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Rate of Interest

Types of Interest rates popularly used in

Hire Purchase Transactions

Add on Rate of Interest Flat Rate of Interest

Effective Rate of Interest


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Lease financing Vs Hire

purchase Financing

Lease Financing

Ownership lies with

vendor(lessor)

Lessor(vendor) is

entitled to claim

depreciation tax shield

HP Financing

Ownership transferred

to the hirer on thepayment of last

instalment.

The hirer is entitled to

claim depreciation taxshield


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purchase Financing.

Capitalization of the

asset is done in the books

of the leasing co.

the entire lease payment iseligible for tax

computation in the books

of the lessee.

Leasing used as a sourceof financing for high cost

assets like ships,

machinery, airplanes etc

Capitalization of the

asset is done in the books

of the hirer.

Only the hire -interest is

eligible for the tax

computation in books of

hirer..

HP use as a source offinance for low cost assets

as automobiles, office

equipments etc.


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purchase Financing.

No Down payment

required for using leased

assets.

In Lessees books, leased

assets shown as a note

only.

Not suitable for lowcapital enterprises , who

desire to show strong asset

position

Down payment is required

to be made for acquiring

the asset, and margin of

20-25% maintained. In hirers books ,HP assets

shown as an asset, and

instalments payable as a

liability. HP suitable for low

capital enterprises , which

need to show strong asset

position.


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purchase Financing.

An asset given on

lease, is fixed asset for

lessor.

All receipts from

lease, is shown in

P&L, the Lessorsbooks.

The hire vendor will

show the HP asset, as

stock in trade, or as

receivables.

Only the interest

portion, from

instalments is taken tothe hire vendors

Profit & loss Account.


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Process of Hire Purchase

The Dealer, contracts with finance co. for financing his hirepurchase deals.

The customer selects the goods for HP, and dealer arranges forthe complete set of documents.

Down payment by customer on completion of proposal form.

Dealer sends documents to finance co. with request to purchasethe goods, and accept the HP transaction.

The finance co. signs the agreement and sends copy along with

EMI details to dealer. Dealer delivers the goods to the customer, property passes on to

the finance co..

Hirer pays EMIs, and on last payment , the ownership passes onto him, with loan completion certificate by the finance co.


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HIRE PURHASELegal Framework

HP act 1972.

Two aspects of HPABailment of goods ,element of sale.

Essential Ingredients of Sale : Two parties, Goods,Money Consideration, Transfer of Ownership,Essentials of a valid contract.

Sale Vs Bailment : Salesconveyance of propertyfrom seller to buyer for a price. Bailment : meretransfer of possession of goods to bailee, with noconveyance intended.


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Sale vs Hire Purchase : Differences :

In HP the possession of the goods with hirer, while

ownership with original owner.

No agreement to buy, but only option to buy under certain

conditions.

Ownership to hirer, only when he exercises his option by

making full payment.

Destruction of goods before making the contract :

destruction/damage, without the knowledge of the seller,

such that goods do not match the description in Contract,

then contract null and void.


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Destruction of goods, after Agreement to Sell but before Sale : damage

without fault of buyer/seller, agreement is void, provided ownership is

not passed on.

Document of Title to Goods : document which enables to deal with

goods as owner. Eg. Cash Memo, bill of lading , dock warrant, lorryreceipt, Railway receipt, Delivery order.

Earnest Money/Security Deposit : payment by buyer in advance, for

due performance of contract. In case of default, liable to be forfeited,

and contract goes off.

Conditions and Warranties : relating to nature and quality of goods andtheir fitness for the buyers purpose. Condition stipulation which

forms the basis of the contract. Warrantystipulation which is

subsidiary to the main purpose of the contract. Legal implications

different for both.


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HIRE PURHASELegal Framework...

Implied Conditions :

- Condition as to Title in case of

Sale/Agreement to sell.- Condition as to Description

- Condition as to Merchantability

- Condition as to Wholesomeness . Implied Warranties : any of the above plus

Quite Possession , Freedom fromEncumbrances.


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Doctrine of Caveat Emptor (let the buyer beware):

applicable to all sale contracts when buyer relies on his

own skill & judgement for suitability of the goods for his

purpose. Then seller cannot be held responsible if there are defects

in the goods., except where

buyers purpose informed to the seller

goods sold by description by a manufacturer/seller.

Seller fraudulently misrepresentsthe latent defects.


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Transfer of Property in Goods :

Two essential requirements :

- Goods must be ascertained & The parties must intend to

pass the property in the goods. Rules for Transfer of Property

Specific goods in Deliverable State : Property in the goods

passes to the buyer when the contract is made, irrespective

of whether , the time of payment of the price or time ofdelivery of the goods is postponed.

Specific goods to be Put in Deliverable State : property in

goods does not pass till the seller converts the goods to a

deliverable state.


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Specific goods to be Weighed or Measured :

if seller required to weigh , measure, test the goods for

ascertaining the price, then Property does not pass till the

same is done, and buyer has notice thereof.

Goods sent on approval (sale or return basis): property ingoods passes on to the buyer, after he has signified his

approval, or if he does not signify the approval, but does not

reject it either till the valid date, then property passes to the

buyer.

Reservation of Rights of Disposal :

if seller reserves the rights of disposal of goods until certain

conditions are fulfilled, then property does not pass on to the

buyer till those conditions are complied with.


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Delivery of Goods : it may be actual, symbolic orconstructive.

Rules of Delivery :

Part Delivery : a delivery of part of the goods, in progress of the wholedelivery, is delivery of the whole. But intentional part delivery is notwhole delivery.

Buyer to Apply for Delivery : seller not bound to deliver, unless buyerapplies for delivery.

Sellers Duty to Deliver: he is duty bound to deliver goods on applicationby buyer , in accordance with the terms of the contract.

Place & Time of Delivery : place & time of delivery as per contract.Otherwise delivery at the place of the goods, at the time of agreement.

Other rules regarding Cost, quantity, delivery in instalments.


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Rights of the Unpaid Seller : Against Goods and Against the Buyer.

Right to Lien : an unpaid seller with possession of goods will retain

them where The goods are no sold under credit, sold on credit butcredit has expired or the buyer becomes insolvent.

Right to Stoppage in Transit : if the buyer is insolvent, then unpaidseller has the right to repossess in transit.

Right of Resale: allowed under limited situations, where the goods areof perishable natureresale possible without notice to buyer/ or afternotice of resale buyer does not pay up/ or when the seller has under thecontract right for resale without any prior notice.


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Buyers Remedies Against the Seller :

Suit for Damages for Non Delivery : where there iswrongful neglection or seller refuses to deliver the goods.

Suit for pricenon delivery after payment. Suit for Specific performancewhere the contract is for

specific goods, suit for delivery of the same goods.

Suit for Repudiation of Contract before due datewhere the seller repudiates the contract before the date ofdelivery, buyer would sue the seller for anticipatorybreach.


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Financial Evaluation

For the Hirer

Cost of Hire Purchase Vs Cost of Leasing

Cost of Hire Purchase is

- Down payment + service charges + PV of hirepurchase payments (Kd)PV of depreciation taxshield (Kc)PV of net salvage value (Kc).

Cost of Leasing is

- Lease management fee + PV of lease payments(Kd)PV of tax shield on lease payments (Kc) +PV of interest tax shield on hire purchase (Kc)


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Financial Evaluation

From the viewpoint of the Vendor :

NPV of Hire Purchase Plan:

- PV of the Hire purchase instalments

+Documentation and service fee

+PV of tax shield on initial direct cost.

_ Loan amount

_ PV of Interest tax of financial income

_ PV of Income tax of financial income

_PV of income tax on documentation


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Consumer Credit

Includes all asset based financing plans

offered to individuals. (eg. Cars,

scooters,VCRs, TVs, Refrigerators, washingmachines etc., personal computers.).

Main supplier of consumer credit are

Multinational Banks, commercial banks,Finance cos..etc


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Consumer Credit...

Salient Features : Parties to the transaction : Bipartite arrangement - two

parties viz borrower/consumer and dealer/financier.

Tripartite Transaction - dealer, financier, and customer.The dealer arranges the credit from the financier.

Structure of the transaction :

Hire-Purchase , Conditional Sale , Credit Sale .

Hire Purchase - Most tripartite consumer credittransactions are of this type. Customer option to purchase

the asset on completion of the pay back period.


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Consumer Credit ...

Conditional Sale : Ownership not transferred until full

payment of purchase price, including the credit charge.

The customer cannot terminate the agreement.

Credit Sale : Ownership transferred to the customer on firstinstalment payment. But the agreement cannot be

cancelled.

Payment Period and ROI :

Payment period - 12 -60 months. ROI - generally flat rate. Effective Rates generally not

disclosed. Sometimes in place of ROI, the EMI for

different payment periods is mentioned.


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Consumer Credit ...

Security :

First charge on assets. The consumer cannot

sell the hypothecated asset. Evaluation

Can be made with Effective Rate of Interest

and rebates for early repayments.

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Hire Purchase of Financial Services

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