Hire Purchase

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HIRE PURCHASE OVERVIEW Starting any business involves a lot of financial plannin planning g for acquisition of fixed assets like land, plant, vehicles, machinery and many others. Most entrepreneurs are scared of lack of capital amount due to big amount of capital needed whe when n a person started to create business. When large capital is involved in the business, an entrepreneur wishes to spread his cost of acquisition of fixed assets over a longer period. Longer period would reduce per year commitment towards the cost of assets. he intention is to match the commitment with the revenue generated per year so that the payments are easily manageable manageabl e without any cash flow mismatch. his problems also faced by individuals individuals who wishes wanted to buy a house or a car for their personal use. !n individual may have a large commitment towards their family. hey have to buy house where they need to stay, a vehicle for their transportation to go anywhere they have to go, and many other family"s needs they have to consider. !ll of this needs a large amount of money in which most peoples cannot afford to settle them in a blink of eyes. hus, they have to plan the best way to manage their financial in order to make their life better. #ne of the best ways to help financing goods is hire purchase purchase.. he core business of $ire %urchase is to provide financing for customer to t o buy private vehicles, private home appliances, business equipment and office machinery. Most of banks in Malaysia provide $% financing. $% financing involved the participations between three parties which are financier, dealer and customers.

DEFINITION OF HIRE PURCHASE PURCHASE $% is a legal term for a contract or an agreement, where the agreement includes includes a letting of goods with an option to purchase and an agreement for the purchase of the goods by instalments.

PARTIES INVOLVED IN HIRE PURCHASE &. 'i 'ina nanc ncie ier( r()a )ank nk *. +ustomers . -ealers

 

TYPES OF GOODS FINANCED &. *. . .

%rivate car  %r %riv ivat ate e home home appl applia ianc nces es )usi )usine ness ss eq equi uipm pmen entt #ffi #ffice ce mach machin iner ery y

HP TRANSACTION &. ! hirer hirer decid decided ed to purchas purchase e an asset asset /e.g 0 )uying )uying a car1 car1 *. he hirer hirer needs needs to pay a down down payment payment to to the deale dealer. r. . he hirer hirer then negotiates negotiates the amount of financing with their their financier. financier. he hirer hirer needs to pay to the dealer whatever amount not beingn covered under the financing. he hirer and the owner /normally the financier1 signed a hire purchase agreement. . he owner owner gives gives the letter letter of undertakin undertaking g to the deale dealerr in order to release release the goods goods /car1 to the hirer. 2. he dealer dealer delivers delivers the goods goods to the hirer upon receiving receiving the letter of undertaking from the owner. he hirer receives receives the goods, inspects it and accepts it after being satisfied with the condition of the goods. 3. he owner owner pays pays the the bala balance nce to to the deal dealer. er. 4. he hirer hirer will need need to pay the monthly monthly instalme instalments nts to the owner(fi owner(financi nancier er..

 

HP AGREEMENT

 

$% agreement is done in writing and must be signed by the hirer and the financier. 5ormally a $% agreement will have the following information, information, as laid down in Section + of the $ire %urchase !ct &634. i. ii ii.. ii iii. i. iv. v. vi vi.. vi viii. viii.. viii

-escr -escript iptio ion n of the the good goods s as woul would d be suffic sufficien ientt to ide identi ntify fy the the goods goods.. Specify Specify time time peri period od an and d when when the period period shall shall start. start."" he he num numbe berr of ins insta talm lmen ents ts and and the the tim time e of of paym paymen ent. t. he he amou mount of of in instal stalme ment nts s Specify Specify the pers person on to whom whom and and the pla place ce at whic which h the pay paymen ments ts to be be made. made. he he add addre ress ss wher where e the the good goods s to to b be e loc locat ated ed.. +ash price ice for the the goods. ods. $ire %urchase %urchase price price /he /he total total sum that must be paid paid to hire hire and then the price price to

ix.

purchase the goods.1 -eposit -eposit amoun amountt /e.g /e.g 0 &78 of the the actual actual price price of the car is the the amoun amountt of deposit deposit that that

x.

the hirer has to pay to the t he car dealer1 ! reasonab reasonably ly compr comprehen ehensive sive statement statement of the the parties parties"" right right /sometim /sometimes es inclu including ding the

xi. xii. xii.

right to cancel the agreement during 9cooling:off period;1. he right right of the hirer hirer to terminat terminate e the the contra contract ct when when he has has a valid valid respon response se to do so. so. ! guar guaran antor tor may may be neede needed d /based /based on on the hire hirerr cre credit dit asse assessm ssmen ent, t, the ban bank k may require a guarantor as an additional security to support the hirer"s application. When the hirer is unable to pay the monthly payment, the guarantor will responsible to

xiii.. xiii

make the payment including the interest1. <nsurance <nsurance coverage coverage througho throughout ut the the duration duration of the hire purchase purchase agreemen agreement. t. The following oblig!ion" h#e !o be f$lfille% b& !he hi'e'(

i. ii ii..

he he hirer has to pay the hire instalments. he he hir hirer er has has to to pay pay the the over overdu due e inst instal alme ment nts s /! pena penalt lty y is is impo impose sed d on over overdu due e instalments when its interest charged on a daily basis. 'or fixed rate financing, the maximum charged allowed is =8 while for variable rate financing, it is *8

ii iii. i.

above the prevailing term charges for variable rate1. o ta take ke reas ason ona able ca care of the the goo goods ds..

iv iv.. v.

o in info form rm the the ow owner ner w whe here re the the g goo oods ds wil illl be be kep kept. t. ! hi hire rerr can can sell sell the the p pro rodu ducts cts if and and o onl nly y ifif h he e has has purc purcha hase sed d the the goo goods ds..

The owne' l"o h" !he 'igh! !o !e')in!e !he g'ee)en! when !he hi'e' b'e*he" n& !e')" !he g'ee)en! of *on!'*!+ Th$", !he owne' h" !he 'igh!( i. ii ii.. ii iii. i.

o forfeit the deposit. o re reta tain in the the iins nstal talme ment nts s alr alrea eady dy paid paid and and rec recov over er th the e bal balan ance ce due. due. o re repo poss sses ess s the the goo goods ds /wh /whic ich h may may hav have e to be by by appl applic icat atio ion n to a +our +ourtt depending on the nature of the t he goods and the percentage of the total instalments

iv. iv.

that have been paid by the hirer1. o cla laiim dam damag ages es for for an anylo los ss suf suffe ferred

 

COMPUTATIONS OF HIRE PURCHASE

&. <nterest amount or also known as term charges /otal amount of interest needs to be paid for the loan1.

>xample 0 >ncik !li borrowed ?M&k to purchase a second hand car. )ank ! provided a loan. >ncik !li must repay the loan by monthly over one year. he interest is &8 per annum.  Interest  Intere st amount = Amount borr borrowed owed × Intere Interest st Rate × Time

@ ?M&777 A 7.& A & @ ?M&7 per annum

*. Monthly rental payment (instalment0 his refers to how much the amount of payment of the t he loan the hirer has to pay per month /including interest1.

 Amount ount borrowed borrowed + Interest )  ( Am

 Monthly Installment =

12 months

@ /?M&777 B ?M&71 ( &* months @ ?M62 <n this case, >ncik !li has to pay ?M62 to bank ! as the monthly payment for his loan for a &* months /a year1.

. Statutory ?ebate /S?1 Statutory rebate is the term used when you pay off a credit agreement before it is due to end. <t entitles you to a proportionate rebate on the interest payable on the agreement. he law provides that borrowers can settle most agreements early, provided certain conditions are met. <t is impossible for the hirer of a hire purchase loan to check the amount of statutory rebate he is entitled to because the calculation formula is not mentioned in the hire purchase agreement. !lso, the description of the formula in the $ire %urchase !ct &634 is almost incomprehensible to the common man.

 

he hirer is entitled to a statutory rebate for terms charges and unexpired insurance. he statutory rebate for terms charges is calculated using a formula derived from section */&1 of the !ct. Simplified, the formula is as below0

I A

-N. -N/0. -T. -T/0.

Where0

I = amount of interest charged  N = number of installments still to go T = total number of installments in the agreement 

Let say, >ncik !bu bought a car. +ar purchase price 0 ?M&77,777 -eposit

0 ?M&7,777

Loan !mount

0 ?M67,777

<nterest

0&8 /flat rate1

ime period for payment payment of the loan 0 2 years ( 37 months

>ncik !li !li has to pay a total of 37 installments in a hire purchase agreement and he is charged an interest amount of ?M2,777 /total interest for f or 37 months1 for the whole period. She has already paid for &* months before she decided to complete the purchaseCearly purchaseCea rly statements. hus, statutory rebate for term charges he is entitled is0 ?M2,777 x /=1 /=B&1(/371 /37B&1 @ ?M*=,6&=.&7

.

 !nnual %erce %ercentage ntage ?ate ?ate /!%?1 /!%?1

 

 !%?, is the )asically, !%? gives an idea of total hire purchase cost of the borrowing. borrowing. !%?, interest rate charged on the amount borrowed. <t reflects the annual cost of borrowing money. !%? makes it easier to compare different loans and credit cards, because you can easily see which loan(credit card would be cheaper. 'or example, a loan with a &78 &78 interest rate is rate is less expensive than a loan with a &28 interest rate rate..  !%? should be stated stated in $% agreement. agreement. he formula formula for !%? is /refer /refer to the seventh schedule of $% act1

 APR =÷

( + NF ) 2 N   F + 300 C ( N + 1 )   2 NF  300 C  2

Where0 5 @ number of instalments + @ number of instalments that are under the contract which will be paid in one year or, where the contract to be completed in less than one year, the number of instalments that would be paid in a year if instalments continued to be paid at the same interval. ' @ the amount determined in accordance with the formula0 100 C × T 

 N × A

 @ otal amount of predetermined term charges  ! @ amount amount financed   'or example, take a look at >ncik !li case. '@ /&77/&*1 x &71 ( &* x &777

 

 @ & hus, the annual percentage rate is0

(

+ 12 x 14 ) 2 × 12 × 12 × 14 + 300 × 12 ( 12 + 1) 2 x 12 x 14 300 x 12

 !%? @

 

@ 3/43=1(/7*B3=771 3/43=1(/ 7*B3=771

 

@ &,*33,7=(27,=* &,*33,7=(27,=*

 

@ *.67328

ISLAMIC CONCEPT

Al 1 I2'h Th$)) l 3 4i5

Dnder the !l:<Earah contract, contract, the hirer /customer1 hires the goods from the owner /the bank1 at an agreed rental over a specified period. Within the hiring period, the hirer signs the

 

leasing contract for the goods from the owner at an agreed price. -uring the period of the agreement, the bank owns the vehicle. Dpon settlement of the hire rentals, the Sales +ontract will be executed, thus transferring the ownership of the vehicle from the bank to the hirer.

$owever, in the event of the customer failing to perform his obligation to service the hire rental or performs otherwise from the terms and conditions stated in the agreement, the bank has the right to exercise reasonable actions to mitigate its losses.

ADVANTAGES ADVANT AGES AND DISADVANTAGES DISADVANTAGES OF HIRE PURCHASE PURCH ASE  !dvantages &. +onv +onven enie ienc nce e in pay payme ment nt - he buyer is greatly benefited as he has to make the payment in installments. his system is greatly advantageous advantageous to the t he people having limited income.

 

*.

<ncreased <ncrea sed Fo Folu lume me #f #f Sale Sales0 s0 - his system attracts more customers as the payment is to be made in easy installments. his leads to increased volume of sales.

.

<ncr <n crea ease sed d %r %rof ofit its0 s0 - Large volume of sales ensures increased profits to the seller.

. >n >nco cour urag ages es Sa Savi ving ngs0 s0 - <t encourages thrift among the buyers who are forced to save some portion of their income for the payment of the installments. his inculcates the habit to t o save among the people. 2. $el $elpfu pfull 'or 'or Smal Smalll ra rade ders0 rs0 - his system is a blessing for the small manufacturers and traders. hey can purchase machinery and other equipment on installment basis and in turn sell to the buyer charging full price. 3. >a >arn rnin ing g #f #f <nt <nter eres est0 t0 - he seller gets the installment which includes includes original price and interest. he interest is calculated in advance and added in total installments to be paid by the buyer. 4. Less sse er ?isk sk00 - 'rom the point of view of seller this system is greatly beneficial as he knows that if the buyer fails to pay one installment, installment, he can get the article back.

-isadvantages.. -isadvantages &.

$igh ghe er %ri %rice ce00 buyer has to pay higher higher price for the article article purchased purchased which includes includes cost plus -  ! buyer interest. he rate of interest is quite high.

*. !r !rti tifi fici cial al -e -ema mand nd00 - $ire purchase system creates artificial demand for the product. he buyer is tempted to purchase the products, even if he does not need or afford to buy the t he product. . $eavy ?i ?isk0

 

-

he seller runs a heavy risk under such system, though he has the right to take back the articles from the defaulting customers. he second hand goods fetch little price.

. -iff -ifficul iculties ties in ?eco ?ecovery very of <nstal <nstallmen lments0 ts0 - <t has been observed that the sellers do not get the installments from the purchasers on time. hey may choose wrong buyers which may put them in trouble. hey have to waste time and incur extra expenditure for the recovery of the installments. his sometimes led to serious conflicts between the buyers and the sellers. 2. )r )rea eak k Dp Dp #f #f 'am 'amil ilie ies0 s0 - he system puts a great financial burden on the families which cannot afford to buy costly and luxurious items. ?ecent studies in western countries have revealed that thousands of happy homes and families have been broken by hire purchase buying"s.

REFERENCES

&. www.bankinginfo.com.my(7*GknowGyourGproducts(7*7*GapplyingGforGloan(hireGpur  chase.php *. www.rhb.com.my(loans(hire:purchase(hpGhireGmain.html . http0((www http0((www.ask.com(busin .ask.com(business:finance(type ess:finance(types:hire:purcha s:hire:purchases:a&=ac7c ses:a&=ac7cf46e2d7H f46e2d7H . http0((www http0((www.akpk.org.my .akpk.org.my(learning(article (learning(articles:and:tips(id(** s:and:tips(id(**(hire:purcha (hire:purchase:loan se:loan 2. http0((www.tradingstandards.gov.uk(cgi:bin(brighton:hove(con&item.cgiI file@Jadv777:&7&&.txt 3. http0((www.calculator.com.my(car:loanH.FSibhvmDd+o 4. http0((credit.abou http0((credit.about.com(od(glossary t.com(od(glossary(g(apr.h (g(apr.htmIutmGterm@ann tmIutmGterm@annual8*7perc ual8*7percentage entage 8*7rateKutmGcontent@p&:main:&: titleKutmGmedium@semKutmGso titleKutmGmedi um@semKutmGsource@msnKutmGca urce@msnKutmGcampaign@adid mpaign@adid:&66d4ef:6 :&66d4ef:6=*6: =*6: 6d=:67&:e&e4*=3743f6:7:abGmspGocode: 376Kad@sem-Kan@msnGsKam@phraseKq@annual8*7percentage

 

8*7rateKdqi@Ko@376Kl@ @Ko@376Kl@semKqsrc@666Ka semKqsrc@666Kaskid@&66d4e skid@&66d4ef:6=*6:6d=: f:6=*6:6d=:67&: 67&: 8*7rateKdqi e&e4*=3743f6:7:abGmsp =. http0((www http0((www.efinancema .efinancemanagement.com(so nagement.com(sources:of:finance urces:of:finance(difference (difference:between:lea :between:lease: se: financing:vs:hire:purchase 6. http0((www.yourarticlelibrary.com(stores(hire:purchase:system:its:advantages:and: disadvantages(*26&4(

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