As per Hire Purchase Agreement, the owner hires goods to the hirer with an option to purchase the goods when he has made the payment of a certain sum. Under this system, the purchaser who is not able to pay the full amount of the asset at one go to acquire the asset and hence after making an initial payment called premium, the purchaser pays the balance amount in instalments. After the payment of all the instalments, the asset passes to the hirer. The hirer has an option to return the goods during the period of hire. In a Hire – Purchase Agreement, the hirer has the right to terminate the agreement for hire at his pleasure and is not bound to pay the balance amount of the goods.
Hire Purchase agreements are of two types.
In the first type, goods are purchased by the financier from the dealer and transfer the ownership rights only after paying all the instalments for the goods.
In the second type of Hire Purchase, the customer purchases the goods and enters into a Hire Purchase Agreement with the financier subject to the payments by the customer to the financier. However, the financier has the right to seize the goods if customer fails to make the payment.