Hire Purchase (HP) is a system of buying goods on credit, where the buyer (hirer) pays the price in installments over time and gets possession of the asset immediately, but ownership is transferred only after the last installment is paid.
✔️ Meaning in simple words:
“It is a credit sale where the buyer gets to use the goods now and pays gradually. Ownership shifts only when all installments are paid.”
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2. Concept of Hire Purchase
Hire purchase is a form of financing mainly for consumers and small businesses.
Under this system:
The seller provides possession of the asset to the buyer immediately.
The buyer pays down payment + regular monthly installments.
Ownership remains with the seller/financier until final payment.
If the buyer defaults, the seller can repossess the goods.
HP involves interest, called hire charges.
Common assets under hire purchase
Cars, bikes
Electronics (TV, fridge, AC)
Furniture
Computers
Machinery for small businesses
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3. Elements of Hire Purchase Agreement
1. Hirer – the buyer who takes goods on hire.
2. Owner – seller or financing company.
3. Asset – goods purchased under HP.
4. Cash price – price of the asset if purchased in cash.
8. Ownership clause – ownership after final installment.
9. Default clause – repossession possibility.
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4. Methods of Installment Under Hire Purchase
Installments may be calculated using different methods. The four major methods are:
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1. Flat Rate Method
Interest is calculated on the entire loan amount for the whole period.
Installments remain equal every month.
Example:
Asset price = ₹1,00,000
Interest = 10% for 2 years
Interest = 1,00,000 × 10% × 2 = ₹20,000
Total = ₹1,20,000
Monthly installment = ₹1,20,000 ÷ 24 = ₹5,000
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2. Reducing Balance Method
Interest is charged on the outstanding balance only.
Installments decrease gradually.
This is more fair and used in modern HP financing.
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3. Advance Installment Method
First installment is paid at the time of signing the agreement.
Used for automobiles, furniture, home appliances.
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4. Balloon Installment Method
Smaller monthly installments
One large final installment (balloon payment)
Used when buyer expects future income (e.g., farmers, seasonal businesses)
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5. Example of Hire Purchase Calculation
Price of scooter: ₹60,000
Down payment: ₹10,000
Balance: ₹50,000
Interest: 12% per year for 2 years (flat method)
Interest = 50,000 × 12% × 2 = ₹12,000
Total amount = ₹62,000
Monthly installment = 62,000 / 24 = ₹2,583.33
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6. Distinction Between Lease and Hire Purchase (Paragraph Form)
Although both lease and hire purchase provide the benefit of using assets without paying the full amount upfront, they differ significantly in ownership, risk, and accounting treatment. In lease financing, the lessee only gets the right to use the asset, while ownership remains permanently with the lessor. The lessee never becomes the owner. In contrast, in hire purchase, the hirer gets possession first, pays the cost through installments, and becomes the owner only after paying the final installment. Furthermore, in leasing, the cost of maintenance and repairs is usually borne by the lessee (financial lease) or lessor (operating lease), whereas in hire purchase, the buyer must bear all maintenance costs. Lease rentals are treated as expenses in accounts, but hire purchase involves interest + principal repayment. Lease is commonly used for business assets (machinery, vehicles), whereas hire purchase is mainly used for consumer goods (cars, electronics). In case of default, a lessor can cancel the lease, but under hire purchase, the owner can repossess the asset.
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7. Real-Life Example
Example 1 — Hire Purchase Car Purchase:
Rahul buys a Honda Amaze on hire purchase. He pays ₹1,00,000 as down payment and agrees to 36 monthly instalments. He uses the car immediately but will become the legal owner only after all payments.
Example 2 — Electronics on Hire Purchase:
Customers buying LED TVs and refrigerators from Bajaj Finance on “0% EMI” schemes — this is a form of hire purchase.
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8. Conclusion
Hire purchase is a consumer-friendly financing method that allows buyers to own assets gradually. It helps people and small businesses acquire expensive goods without large upfront payments. It is different from leasing, where ownership never transfers. Hire purchase remains a major instrument for retail finance across India.
