Hire Purchase Finance and Consumer Credit

A
PRESENTATION
ON
HIRE PURCHASE FINANCE
AND CONSUMER CREDIT
Presented By:-
Suresh chaudhary
(805)
Hiral Dayma (806)
CONTENT
 HIRE PURCHASE - DEFINITION
 HIRE PURCHASE FINANCE – MEANING
 RATE OF INTEREST
 LEASE FINANCING VS HIRE PURCHASE
FINANCING
 ADVANTAGES AND DISADVANTAGES OF HP
 PROCESS OF HIRE PURCHASE
 FINANCIAL EVALUATION
 CONSUMER CREDIT
Hire purchase - definition
 An agreement under which
goods are let on hire and under
which the hirer has an option to
purchase them in accordance
with the terms of the agreement.
Hire Purchase Finance -
Meaning
 Payment of Periodic instalments
 Immediate possession of goods by the buyer
 Ownership of goods with vendor until full and
final payment
 Vendor’s right to repossess the goods in case of
default by buyer
 Treatment of instalment as a hire charge till the
payment of last instalment.
Rate of Interest
Types of Interest rates popularly used in
Hire Purchase Transactions
 Flat Rate of Interest
 Effective Rate of Interest

Lease financing Vs Hire
purchase Financing
Lease Financing HP Financing
 Ownership lies with  Ownership transferred
vendor(lesser) to the hirer on the
payment of last
installment.
 Capitalization of  Capitalization of the
the asset is done in the asset is done in the
books of the leasing co. books of the hirer.
purchase Financing….
 The entire lease payment  Only the hire
is eligible for tax -interest is eligible
computation in the for the tax
books of the lessee. computation in
 Leasing used as a source books of hirer..
of financing for high
cost assets like ships,
 HP use as a source
machinery, airplanes etc of finance for low
cost assets as
automobiles, office
equipments etc.
 No Down payment required  Down payment is required
for using leased assets. to be made for acquiring
the asset, and margin of
20-25% maintained.
 In Lessee’s books, leased  In hirer’s books ,HP assets
assets shown as a note only. shown as an asset, and
installments payable as a
liability.
 An asset given on lease, is  The hire vendor will
fixed asset for lesser.
show the HP asset, as
stock in trade, or as
receivables.
 Only the interest
 All receipts from portion, from
lease, is shown in installments is
P&L, the Less or's taken to the hire
books. vendor’s Profit &
loss Account.
ADVANTAGES &
DISADVANTAGES
Disadvantage of hire purchasing
 Advantages of Hire
Purchasing  Inflexible: difficult to escape the
outstanding settlement if say, a
 Cash flow: payment by vehicle is no longer required.
instalments.  High deposit compared to contract
 Writing down allowances apply. hire.
 Hire purchase is an alternative
 Business hire purchase appears as a
debt on the balance sheet which
funding line to bank overdrafts could inhibit future borrowing.
 Attracts fixed rate interest.  More expensive than contract hire
 Others same as Outright  Burden of controlling and running
Purchase. fleet
Process of Hire Purchase
 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.
Financial Evaluation
 For the Hirer
 Cost of Hire Purchase Vs Cost of Leasing
 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).
Cost of Leasing is
- Lease management fee + PV of lease
payments (Kd) – PV of tax shield on lease
payments (Kc) + PV of interest tax shield
on hire purchase (Kc)
Financial Evaluation
From the viewpoint of the Vendor :

 NPV of Hire Purchase Plan:
 - PV of the Hire purchase instalments
 +Documentation and service fee
 +PV of tax shield on initial direct cost.
 _ Loan amount
 _ PV of Interest tax of financial income
 _ PV of Income tax of financial income
 _PV of income tax on documentation

Consumer Credit
 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
Consumer Credit...
Salient Features
 Parties 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.
THANK
YOU

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What are the different types of consumer credit?

What are the main differences between hire purchase and lease financing?

A

 Effective Rate of Interest

 Cost of Hire Purchase is

- Down payment + service charges + PV of

From the viewpoint of the Vendor :

 - PV of the Hire purchase instalments

 +Documentation and service fee

 +PV of tax shield on initial direct cost.

 _ PV of Interest tax of financial income

 _ PV of Income tax of financial income

 _PV of income tax on documentation

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