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Hire purchase



Hire purchase (HP) is the legal term for a conditional sale contract developed in the UK, and now found in India, Australia, New Zealand, and other states which have adopted the English law concept. In cases where a buyer cannot afford to pay the asked price as a lump sum but can afford to pay a percentage as a deposit, the 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. If the buyer defaults in paying the instalments, the owner can repossess the goods which differentiates HP from other unsecured consumer credit systems and benefits the economy because markets can expand while minimising the seller's exposure to risk of default. Equally, HP is advantageous both to private consumers because it spreads the cost of expensive items over an extended time period, and to certain business consumers in that the balance sheet and taxation treatment of hire purchased goods differs from outright capital purchases. The need for HP is reduced when consumers have collateral or other forms of credit are readily available.


 


The following is a statement of principles common to the different state laws. For a detailed explanation, readers should refer to the law operating in the state 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::


 


a clear description of the goods


the cash price for the goods


the HP price, i.e., the total sum that must be paid to hire and then purchase the goods


the deposit


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


a reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period).


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.


Implied warranties and conditions to protect the hirer

The extent to which buyers are protected varies from state to state, but the following are usually present:


 


the hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will interfere with the hirer's possession during the term of this contract


the owner will be able to pass title to, or ownership of, the goods when the contract requires it


that the goods are of merchantable quality and fit for their purpose, save that exclusion clauses may, to a greater or lesser extent, limit the Finance Company's liability


where the goods are let by reference to a description or to a sample, what is actually supplied must correspond with the description and the sample.

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