A hire purchase agreement or contract is an agreement of purchase where the goods or assets are let out on hire by the seller/finance company (the creditor) to the user of goods/ assets, i.e., hire purchase customer (Hirer). The hirer pays installments at regular intervals in the form of consideration and gets the ownership of the asset after paying the last installment.
Hire purchase is a contract between two parties where a purchaser agrees to pay for goods in parts. The hire purchase agreement was first initiated in the United Kingdom for situations where the buyer could not afford to pay the required price for an item as a lump sum but could afford to pay at regular intervals small amounts.
The seller asks for a sum equal to the asset’s original price plus interest to be paid in equal installments. If the buyer defaults in paying the installments, the seller may repossess the goods.
Contents of Hire Purchase Agreement
- The date on which the agreement is to be made.
- The details of the seller/ finance company (of one part):
- Type of Business
- Type of organization like proprietorship/partnership firm/ Company etc.
3. The details of the purchaser/ hirer (of the other part).
4. The date on which the asset is let out on hire and the period up to which it is let out.
5. The name, type, model no. and make of the asset to be let out.
6. Details of installation expenses and the person who will bear them.
7. The cash price of the asset.
8. The hire purchase price, i.e. (total of all installments + any deposit + any fees)
9. The payment details:
- Amount of installment
- Time of payment, i.e., first day / last day / any date of the month.
- Nature of interval, i.e., monthly, quarterly, etc.
- Mode of payment, i.e., cash/ cheque.
10. The authority of inspection of the asset by the owner or a person assigned by him.
11. Details of the hirer’s rights if he wants to terminate the agreement.
12. Consequences when the hirer defaults in paying the installment amount or breaches any point in the contract, i.e., the owner has the right to re-take possession of the assets on these grounds.
13. A statement that the owner at his will can grant relaxation of any sort.
The agreement shall be signed by the two parties indulged in the presence of two witnesses.
Points to be noted while preparing the hire purchase agreement
- One should pay extra care while selecting the asset. He should enquire whether the asset he has asked for is not already owned by anyone else. It may so happen that the person might not actually own it and therefore does not have the right to sell it off.
- Secondly, keep a check on the cumulative installment amount to make sure it is not unreasonably more than the asset’s value.
- The hirer should also possess a copy of the hire purchase agreement.
- This mode is generally used for cars and high-value electrical goods where the buyers are not able to pay for the goods directly.
After all, a hire purchase agreement is also an agreement like any other agreement. There is no fixed rule like 2+2=4. Any agreement cannot be said as good or bad. The agreement can be changed as per the convenience with the consent of both the parties, i.e., the hirer and the HP company. The hirer should make sure that the agreement mentions the hire charges and other terms of payment and their consequences in the manner he understands and interprets and that the terms are favorable as far as possible and agreeable. Similarly, the hire purchase company should look for its interest in the agreement. In the end, the agreement should have clarity of terms mutually agreeable to each party.