Hire purchase & consumer credit

Jyoti Singh(012067)Komal Singh(012067)

Mamta Chauhan(012082)

According to hire purchase act of 1972.An agreement under which goods are let on hire under which the hirer has an option to purchase them in accordance with the terms of agreement and include an agreement under which.�

Possession of goods is delivered by the owner thereof to a person on the condition that such person pays the amount in periodic payments �

The property of the goods is to pass to such a person on the payment of the last installment. �

Such a person has a right to terminate the agreement any time before the property so passes.

Hire purchase definition

Flat Rate of Interest Effective Rate of Interest

Rate of Interest

The hirer is required to make a down payment of 20-25% of the cost and pay the balance amount along with interest in advance or arrears over a time period of 36-48months �

Alternatively, instead of the down payment, the hirer as to deposit an equal amount as a fixed deposit with the finance company which provides entire finance on hire purchase terms, repayable with interest in EMI over 36-48 months.

Operation of HP transaction

The interest on each hire purchase installment is computed on the basis of flat rate of interest is applied to the declining balance of original loan amount to determine the interest component of installment for a given flat rate of interest, the equivalent effective rate of interest is higher.

The Dealer, contracts with finance co. for financing his hire purchase deals.

The customer selects the goods for HP, and dealer arranges for the complete set of documents.

Down payment by customer on completion of proposal form. Dealer sends documents to finance co. with request to

purchase the goods, and accept the HP transaction. The finance co. signs the agreement and sends copy along

with EMI details to dealer. Dealer delivers the goods to the customer, property passes

on to the finance co.. Hirer pays EMIs, and on last payment , the ownership passes

on to him, with loan completion certificate by the finance co.

Process of Hire Purchase

Advantages Disadvantages

No immediate cash � � Easy possession � Economic growth � Thrift� Relief to buyer

Reputed buyers May lead to bankruptcy � Buyer has to mortgage his

property Buyer may incur loss � � May lose paid installments

in the event of default � It is expensive � Loss to seller in the event

of default by the buyer.

For the Hirer-

Cost of Hire Purchase is- Down payment + service charges + PV of hire purchase payments (Kd) – PV of depreciation tax shield (Kc) – PV of net salvage value (Kc)For the vendor-NPV of hire purchases plan-PV of hire purchase instalment+documentation and service fee+ PV of tax shield on initial direct cost

Financial Evaluation

Loan amount PV of interest tax of financial income. PV of interest tax of financial documentation.TAX CONSIDERATION OF HIREPURCHASE:-

INCOME TAX ASPECT it is governed by central board of direct

taxes(CBDT) in 1943. This circular specifies that the hirer is entitled

to the tax shield on depreciation ,which is calculated with reference to the cash purchase price & tax shield on the consideration for hire.

SALES TAX ASPECT A sale is deemed to take place only when the

hirer exercises an option to purchase. Sales tax amount must be fixed with

depreciated value of goods. There is no uniform rate of sales tax applicable

to hire purchase. it vary from state to state.INTEREST RATE ASPECT It is payable on the total amount of interest

aggregating to a hire purchase company in the previous year at the rate of 3%.

Payable amount of interest established during the previous year can be deducted from chargeable interest.

Consumer Credit•A debt that someone incurs for the purpose of purchasing a good or service. This includes purchases made on credit cards, lines of credit and some loans.Also referred to as "consumer debt".•Includes all asset based financing plans offered to individuals. ( eg. Cars, scooters , VCRs, TVs, Refrigerators, washing machines etc., personal computers.).

•Main supplier of consumer credit are Multinational Banks, commercial banks , Finance cos..etc

Salient FeaturesParties to the transaction: Bipartite arrangement- two parties viz borrower/consumer and

dealer/financier.Tripartite Transaction-dealer, financier, and customer.

The dealer arranges the credit from the financier. Structure of the transaction: Hire-Purchase ,

Conditional Sale , Credit Sale . Hire Purchase -Most tripartite consumer credit

transactions are of this type. Customer option to purchase the asset on completion of the pay back period.

Consumer Credit ...

Conditional Sale :Ownership not transferred until full payment of purchase price, including the credit charge. The customer cannot terminate the agreement.

Credit Sale: Ownership transferred to the customer on first instalment payment. But the agreement cannot be cancelled.

Payment Period and ROI:Payment period - 12 -60 months. ROI - generally flat rate Effective Rates generally not

disclosed. Sometimes in place of ROI, the EMI for different payment periods is mentioned.

Consumer Credit

Security : First charge on assets. The consumer cannot sell the hypothecated asset.

Evaluation: Can be made with Effective Rate of Interest and rebates for early repayments.

Consumer Credit ...

Advan…. Convenience Emergencies Large purchasesDisadv… Temptation More expensive Unrealistic life style Can ruin credit

Advantages and Disadvantages of consumer credit