Differences between Hire Purchase and Installment Purchase System

25/08/2022 0 By indiafreenotes

Hire Purchase system is a system in which the goods are delivered to the purchaser at the time of agreement before the payment of instalments but the title of the goods is transferred after the payment of all instalments as per the hire purchase agreement. It is a special system of purchase and sale of goods. Under this system the purchaser pay the price of goods in instalments.

Features:

  • The purchaser has a right to use the goods delivered.
  • The goods will be delivered to the purchaser at the time of the agreement.
  • The price of the goods will be paid in the instalments.
  • If all the instalments are paid as per the terms of agreement, the title of the goods is transferred by the vendor to the purchaser.
  • Every instalment will be treated to be the hire charges of the goods which is being used by the purchaser.
  • If there is default in the payment of any of the instalments, the vendor will take away the goods from the possession of the purchaser without refunding him any amount received earlier in the form of instalments.

An instalment system is a credit sale system in which payments are made in instalments over a period of time. In this system, the buyer gets the possession of the goods as well as the ownership of the goods right at the time of signing the agreement. During the course of paying the instalment, the vendor cannot responses to the goods. In that case, the vendor can sue the buyer only for the recovery of dues.

Features of Instalment System

  • The buyer makes the payment in different instalment over a periods of time as agrees upon in the agreement.
  • Instalment purchase system is just like an outright credit sale of goods.
  • Under instalment system, the buyer gets the immediate possession as well as the ownership of the goods.
  • In case of default in the payment of instalment, the total amount of instalments already paid by the buyer cannot be forfeited.
  • Under this system, the buyer can sell or mortgage the goods as the ownership is with the buyer.
  • The seller cannot claim the good back if the buyer made default in the payment of instalment.
  • Risk of the goods/ assets are to borne by the buyer just after signing the agreement.
  • The buyer of the goods under this system has no right to return the goods to the seller.

Differences:

Installment/Hire Charges

The monthly or period payment in installment purchase is termed an installment whereas, in hire purchase arrangement, it is called hire charges. Installment derives its value from the length of time, the sale value of an asset, and the interest rate. In contrast, the hire charges are a function of two additional factors, viz. option of termination and repairs and maintenance. Ideally, the installment should be less than the hire charges for the same asset. Therefore, hire purchase is an expensive system compared to installment purchase.

Option / Right to Terminate

In the case of the hire purchase agreement, the hirer has an option/right to terminate the agreement and return the goods, whereas there is no such right or option available to the buyer in case of an installment purchase. This is because the purchase has not taken place in the case of hire purchase, but it takes place at the beginning only.

Right to Sell or Transfer

The owner of the assets always exercises the right to sell or transfer. In the case of hire purchase, this right lies with the financing company or seller as the case may be because they are the owners of the asset. In the case of an installment purchase, it is with the buyer because he becomes the owner on the day he signs the agreement.

Risk, Repair, and Maintenance related to Asset

In hire purchase, all the risks are borne by the financing company until the hirer’s last payment because it is the official owner of the asset till that time. In installment purchases, the risks are borne by the buyer from day one. Similarly, repair and maintenance is the headache of the financier in the case of hire purchase and the buyer in case of an installment purchase.

The default of Installment/Hire Charges

When a hirer defaults in the payment of hire charges, the financier has the right to forfeit the money paid till that date and take back possession of the goods. Whereas in installment purchase, the installment paid are not forfeited, and the financier is liable to receive the remaining dues.