What is Hire Purchasing?
Hire Purchasing is a financing arrangement where an individual or business acquires an asset, such as machinery or equipment, without having to pay the full purchase price upfront. Instead, they make regular installment payments over a specified period, typically ranging from months to years. While the asset is in use, it remains the property of the financing company or the seller. Ownership is only transferred to the purchaser once all the installment payments, including any interest charges, have been completed. This structure allows businesses to obtain essential assets immediately, without having to make a significant initial investment.
The working of Hire Purchasing is as follows:
- Selection of Asset: The hirer chooses the asset they wish to acquire and negotiates the terms of the hire purchase agreement with the seller.
- Initial Payment: The hirer pays an initial deposit or down payment, which is usually a percentage of the total purchase price.
- Installment Payments: The remaining purchase price is divided into equal installments to be paid over a specified period, typically monthly or quarterly.
- Use of the Asset: While the hirer makes installment payments, they have the right to use the asset for their business or personal use.
- Ownership Transfer: Ownership of the asset remains with the seller until the final installment is paid. Once all installments, including any interest charges, are completed, ownership of the asset transfers to the hirer.
- Legal Obligations: Throughout the hire purchase agreement, the hirer is legally obligated to make timely payments according to the terms of the agreement. Failure to make payments can result in repossession of the asset by the seller.
Difference between Hire Purchasing and Leasing
Hire Purchasing and Leasing are both methods of acquiring assets without the need for an upfront purchase. However, they differ in terms of ownership, payment structure, and the transfer of risk. Hire Purchasing involves acquiring an asset through a series of installment payments over a specified period; whereas, Leasing involves renting an asset from the owner (lessor) for a specified period in exchange for periodic payments.