A hire purchase agreement is one under which the buyer takes delivery of goods, promising to pay the price in certain number of instalments and until full payment is made, to treat the payment as hire charges for using the said goods. In fact, a hire purchase agreement stipulates that

(i) the delivery of goods will be given by the owner of goods to the hire purchaser

(ii) payment will be made in instalments

(iii) each instalment will be treated as hire charge so that if default in respect of payment of even the last instalment is made, the seller will be entitled to take away the goods without compensating the hire purchaser in any form

(iv) if all instalments are paid and the other conditions are fulfilled, the ownership of the goods will pass to the buyer.

Therefore in case of hire purchase, the seller i.e., the vendor gives only the possession of the goods and retains the ownership with him until the last instalment is paid. In other words, the hire purchaser is only the user of the goods and not the owner. In case, he fails to pay the instalments, the vendor will take his goods back. Apart from that, the vendor will not pay back the amount received from the purchaser. Such an amount will be treated as hire charge for the goods. Therefore, till the last instalment is paid, the hire purchaser has got an option, whether to purchase that particular article or not.

As mentioned earlier, the payment made by the hire purchaser under this system is always more than what he pay if he decide to go for cash purchase. The reason is that, apart from the cash price, the hire purchase price includes:

i)     interest for payment being made over a period of time,

ii)     the payment for the risk taken by the seller,

iii)    expenditure on the registration, insurance and delivery of goods, etc.

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