Hire Purchase Finance And Consumer Credit 653yp

A PRESENTATION ON HIRE PURCHASE FINANCE AND CONSUMER CREDIT Presented By:Suresh chaudhary (805) Hiral Dayma

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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 of the agreement.

Hire Purchase Finance Meaning   

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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 

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Lease Financing Ownership lies with vendor(lesser)

Capitalization of the asset is done in the books of the leasing co.

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HP Financing Ownership transferred to the hirer on the payment of last installment. Capitalization of the asset is done in the books of the hirer.

Lease financing Vs Hire purchase Financing…. 

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The entire lease payment is eligible for tax computation in the books of the lessee. Leasing used as a source of financing for high cost assets like ships, machinery, airplanes etc

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Only the hire -interest is eligible for the tax computation in books of hirer.. HP use as a source of finance for low cost assets as automobiles, office equipments etc.

Lease financing Vs Hire purchase Financing…. 

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No Down payment required for using leased assets.

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In Lessee’s books, leased assets shown as a note only.

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An asset given on lease, is fixed asset for lesser.

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Down payment is required to be made for acquiring the asset, and margin of 20-25% maintained. In hirer’s books ,HP assets shown as an asset, and installments payable as a liability.

The hire vendor will show the HP asset, as stock in trade, or as receivables.

Lease financing Vs Hire purchase Financing….  

All receipts from lease, is shown in P&L, the Less or's books.

Only the interest portion, from installments is taken to the hire vendor’s Profit & loss .

ADVANTAGES & DISADVANTAGES 

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Advantages of Hire Purchasing

Cash flow: payment by instalments.

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Writing down allowances apply.

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Hire purchase is an alternative funding line to bank overdrafts

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Attracts fixed rate interest.

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Others same as Outright Purchase.

Disadvantage of hire purchasing 

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Inflexible: difficult to escape the outstanding settlement if say, a vehicle is no longer required. High deposit compared to contract hire. Business hire purchase appears as a debt on the balance sheet which could inhibit future borrowing. More expensive than contract hire Burden of controlling and running fleet

Process of Hire Purchase 

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

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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 

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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 ... 

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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 ...  

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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.

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