HIRE PURCHASE FINANCE AND CONSUMER CREDIT

CHAPTER 5 M Y KHAN - Financial Services

Hire Purchase Finance Meaning

Payment of Periodic instalments Immediate possession of goods by the buyer Ownership of goods with vendor until full and 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.

Hire purchase - definition

An agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement.

Rights of the Hirer

Right of Protection Right of Notice Right of Repossession Right of Statement Right to Excess Amount

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

Lease financing Vs Hire purchase Financing

Lease Financing Ownership lies with vendor(lessor) HP Financing Ownership transferred to the hirer on the payment of last instalment. The hirer is entitled to claim depreciation tax shield

Lessor(vendor) is entitled to claim depreciation tax shield

Lease financing Vs Hire purchase Financing.

Capitalization of the asset is done in the books of the leasing co. the entire lease payment is eligible for tax computation in the books of the lessee. Leasing used as a source of 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 of finance for low cost assets as automobiles, office equipments etc.

Lease financing Vs Hire purchase Financing.

No Down payment required for using leased assets. In Lessees books, leased assets shown as a note only. Not suitable for low capital 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.

Lease financing Vs Hire purchase Financing.

An asset given on lease, is fixed asset for lessor. All receipts from lease, is shown in P&L, the Lessors books. The hire vendor will show the HP asset, as stock in trade, or as receivables. Only the interest portion, from instalments is taken to the hire vendors Profit & loss Account.

Process of Hire Purchase

The Dealer, contracts with finance co. for financing his hire purchase deals. The customer selects the goods for HP, and dealer arranges for the complete set of documents. Down payment by customer on completion of proposal form. Dealer sends documents to finance co. with request to purchase the 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 on to him, with loan completion certificate by the finance co.

HIRE PURHASE

Legal Framework

HP act 1972. Two aspects of HPA Bailment 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 : Sales conveyance of property from seller to buyer for a price. Bailment : mere transfer of possession of goods to bailee, with no conveyance intended.

HIRE PURHASE

Legal Framework

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.

HIRE PURHASE

Legal Framework

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, lorry receipt, 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 and their fitness for the buyers purpose. Condition stipulation which forms the basis of the contract. Warranty stipulation which is subsidiary to the main purpose of the contract. Legal implications different for both.

HIRE PURHASE

Legal 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 from Encumbrances.

HIRE PURHASE

Legal Framework...

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 misrepresents the latent defects.

HIRE PURHASE

Legal Framework...

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 of delivery 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.

HIRE PURHASE

Legal Framework...

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 in goods 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.

HIRE PURHASE

Legal Framework...

Delivery of Goods : it may be actual, symbolic or constructive.

Rules of Delivery :
Part Delivery : a delivery of part of the goods, in progress of the whole delivery, is delivery of the whole. But intentional part delivery is not whole delivery. Buyer to Apply for Delivery : seller not bound to deliver, unless buyer applies for delivery. Sellers Duty to Deliver: he is duty bound to deliver goods on application by 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.

HIRE PURHASE

Legal Framework...

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 but credit has expired or the buyer becomes insolvent.

Right to Stoppage in Transit : if the buyer is insolvent, then unpaid seller has the right to repossess in transit.
Right of Resale: allowed under limited situations, where the goods are of perishable nature resale possible without notice to buyer/ or after notice of resale buyer does not pay up/ or when the seller has under the contract right for resale without any prior notice.

HIRE PURHASE

Legal Framework

Buyers Remedies Against the Seller : Suit for Damages for Non Delivery : where there is wrongful neglection or seller refuses to deliver the goods. Suit for price non delivery after payment. Suit for Specific performance where the contract is for specific goods, suit for delivery of the same goods. Suit for Repudiation of Contract before due date where the seller repudiates the contract before the date of delivery, buyer would sue the seller for anticipatory breach.

Financial Evaluation
For the Hirer Cost of Hire Purchase Vs Cost of Leasing Cost of Hire Purchase is - Down payment + service charges + PV of hire purchase payments (Kd) PV of depreciation tax shield (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)

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

Consumer Credit
Includes all asset based financing plans offered to individuals. (eg. Cars, scooters,VCRs, TVs, Refrigerators, washing machines etc., personal computers.). Main supplier of consumer credit are Multinational Banks, commercial banks, Finance cos..etc

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 credit transactions are of this type. Customer option to purchase the asset on completion of the pay back period.

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 first instalment 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.

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.