Nature of Hire purchase

Nature of hire purchase

Hire purchase is a method of purchasing goods whereby the buyer (hire purchaser) enters into an agreement with the seller (hire vendor) for the exchange of goods/properties by paying through a series of regular instalments. This system allows the seller to retain ownership of the sold goods/properties until the final instalment is paid. Hire purchase method is extensively applied in the acquisition of non-current assets such as equipment, machinery, motor vehicle, and the like.

Terms used in hire purchase

Hire vendor

A person who delivers the goods along with its possession to hire purchaser under the hire purchase agreement.

Hire purchaser

A person who obtains goods/properties and the right to use them but not ownership, from hire vendor under hire purchase agreement.

Hire purchase price

The total amount payable by hire purchaser to obtain ownership of the asset purchased under hire purchase agreement. The hire purchase price comprises of cash price plus hire purchase interest.

Hire purchase interest

An amount of money paid by hire purchaser to hire vendor, above the cash price, as a compensation for time value of money and risk on deferred instalments.

Hire purchase instalment

An amount which the hire purchaser pays in regular intervals up to a certain period to obtain ownership of asset as specified in the hire purchase agreement. For example, an asset might be sold for cash at TZS 5,000,000. But if sold on hire purchase the sale price becomes 5,400,000, which should be paid in full on monthly basis within 6 months. In this case the monthly instalment becomes TZS 900,000, while the interest is TZS 400,000.

Cash price

An amount to be paid by buyer on outright purchase in cash.

Down payment

An initial payment made to the hire vendor by hire purchaser at the time of entering into hire purchase agreement.

Possession

A condition of having control over the goods/assets without regard to their ownership. The hire vendor transfers only possession of the goods to the hire purchaser immediately after the agreement for hire purchase is made.

Repossession

A condition occurring when a hire purchaser default payment of one or more instalments. Under this condition, the hire vendor takes back the goods/assets without making any compensation to the hire purchaser.

Ownership

A state of legal possession and control over the goods/assets. The hire vendor passes to the hire purchaser the right to possess but not to own the asset involved.