Hire purchase involves a certain procedure, that is to say, modus operandi to be followed. For this, an agreement called hire purchase agreement is made in written between the parties involved in the hire purchase transaction.

The agreement contains the following:

(i) The hire purchase price of the goods to which the agreement relates;

(ii) The cash price of the goods, that is to say, the price at which the good is purchased for cash;

(iii) The date of the commencement of the agreement;

(iv) The number and time interval of installments by which the hire purchase price is to be paid;

(v) The name of goods, with its sufficient identity, to which the hire purchase agreement relates to;

(vi) The amount to be paid, if any, at the time of signing the agreement;

(vii) The signatures of the parties involved in transaction.

If the hire purchase transaction is financed by the manufacturer or dealer, then two parties, called, hire vendor and hire purchaser, are involved in the agreement. The hire purchase transaction is financed by some financial institution, and then there are three parties involved in the transaction.

These are:

(i) Hire Vendor,

(ii) Hire Purchaser, and

(iii) Financial Institution.

In such case, the vendor, firstly, receives the bills of exchange for hire purchase price of the goods from the hirer. The vendor, then, discounts the bills with the financial institution and, thus, gets payment for the goods sold under hire purchase system. The financial institution collects the payments of the bills from the hirer, as and when the installments fall due.

This entire process is depicted in the following Figure 20.1.

Hire-purchase transaction benefits all parties involved in it. While it increases vendor’s sales, it enables the hire purchaser to make use of costly machinery, equipment’s, etc., without making full payment on the date of signing the agreement. After making the payment of the last installment, the hire purchaser also acquires the ownership of the goods purchased under hire-purchase system.

NSIC and Hire Purchase:

Small scale firms can acquire industrial machinery, office equipment, vehicles, etc., without making full payment through hire purchase. With the help of assets acquired through hire purchase they can produce and sell. From the earning payments can easily be made in installments. Ultimately the ownership of assets can be acquired.

Now several agencies like NSIC provide machinery and equipment to small scale units on hire purchase basis and on lease basis.