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Hire Purchase and Consumer Credit

Dr Saif Siddiqui

Defined :

Hire purchase is a

peculiar transaction in which the goods are let on hire with the option to hirer to purchase them

It is a mode of financing the price of goods to be sold at a future date

Features:

Payment to be made in installments over a specified period The possession is delivered to the hirer at the time of entering into the contract Property is passed to the hirer after last installment is paid If a default is made , seller become entitled to take away the goods The purchaser is free to return the goods with out paying any further installment

Hire purchase Vs Installment payment

In installment sale ,

the contract of sale is entered into ,


the goods are delivered and ownership is transferred ownership is transferred to the hirer when he exercises the option and last installment is paid

In hire purchase,

Hire purchase Vs leasing

Ownership

Ownership is transferred , when hire purchaser exercise the option


But Lessor is the owner in leasing Depreciation is charged in the books of lessor Hire purchaser is entitled for depreciation shield on assets hired

Depreciation

Hire purchase Vs leasing

Magnitude

Magnitude of funds involved in the leasing is very large


Relatively lesser in hire purchase Leasing is 100% financing In hire purchase a margin is required

Extent

Hire purchase Vs leasing

Maintenance Cost is maintenance is borne by the hirer In financial lease , cost is borne by lessee In operating lease, cost is borne by lessor

Hire purchase Vs leasing

Tax benefit hire purchase

Hirer is allowed the depreciation claim and finance charge


Seller may claim benefit of any interest taken to acquire the asset Lessor is allowed to claim depreciation

Tax benefit- leasing

Lessee is allowed to claim the rentals and maintenance cost

Hire purchase agreement

Nature of agreement

term and commencement etc

Delivery of equipment

The place , time, hirer liablity to bear delivery charges

Location

The place where the equipment is to be kept during the period

Hire purchase agreement

Hire charges

Amount to be paid, time schedule, rate of interest , penalty of delayed payment

Alteration

Not to make any alteration , additions with out prior consent The events that will constitute a default

Termination

Hire purchase agreement

Risk

Of loss and damage to be borne by the hirer

Registration and fee Stamp duty Schedule of equipments forming subject matter Schedule of hire charges

Consumer Credit

Consumer credit includes

all asset based financing plans


offered to primarily to individuals to acquire durable consumer goods

Consumer buyer pay a small fraction of the cash purchase at the time of delivery

Features:

Parties to the transaction

Bipartite arrangement

Borrower/consumer and dealer cum financer

Tripartite arrangement

Borrower/ consumer , dealer and financer

Mode of payment Payment period and rate of interest Security

Consumer can not sell/ pledge hypothecate the asset

Features:

Structure of the transaction Hire purchase Conditional sale


Ownership is transferred after paying amount

Customer can not terminate the agreement


Ownership is transferred to the customer on payment of first installment Customer can not terminate the agreement

Credit sale

Cases in favour :

Compulsory saving Convenient mode Realization of dreams Accelerates industrial investment

Enhanced living standard


Protection against inflation

Cases against:

Thought less buying Insolvency Costlier Risk for traders Artificial boom

Rise of consumer financing in Indian


Fall in average age of consumer Cheaper rates Flexible rate structure Increased start up salary

Changed life style


Credit card advantage Second hand car market

Increased tie up of manufacturers and financers etc.

Consumer Credit Scoring: Dunham Greenberg formula


Parameter
Applicants employment record Applicants income Applicants finance Types of security offered

Score (points)
20 25 10 20

Past payment record


total

25
100

Consumer Credit Scoring: Specific Fixed formula


Parameter Age Sex Stability of residence Occupation Industry Credit score 0.1 - 0.5 0.4 0.042 - 0.42 0.16 0.55 0.21

Stability of employment
assets

0.059 0.59
0.20 0.45

Consumer Credit Scoring: Machinery Risk formula

Used in government offices Loan amount sanctioned can be determined


Down payment + (0.124*monthly income) + (6.45*length of services in months)

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