Hire purchase agreement in India: An Insight


In a hire-purchase arrangement, the owner of the items agrees to let the hirer rent the products in exchange for a fixed monthly payment. This agreement contains a plan for purchasing pricey consumer goods like automobiles, televisions, heavy equipment, etc. The hire-purchaser can buy products by making a down payment up front and the remaining balance over time in instalments. The hire-purchase then owns the item after the final instalment is made. Through these contracts, many industries finance their heavy equipment. It is utilised in circumstances when the customer could afford the item if paid for in instalments at regular intervals but could not afford to buy it in one go. For example, the finance firm hypothecates the purchase of a motor vehicle made according to a hire-purchase agreement in the Registration Certificate Book and also makes reference to the acquisition in the insurance policy. The finance business issues a certificate to the buyer upon completion of the amount once the hire-purchaser has paid all of the instalments. After receiving notification, the Regional Transport Office removes the hypothecation from the R.C. book with effect as of a specific date. The insurance provider will be alerted, and it will revoke the hypothecation by adding an endorsement to the insurance policy. At that point, full ownership is handed over to the hire-purchaser.

The vendor will typically request a down payment in the range of 20–25 percent of the item’s original price, plus interest, to be paid in equal monthly payments. The owner or seller may take back the goods in the event that the hire-purchaser defaults on payment. The hire-purchase contract is not a sale contract; rather, it is a bailment contract, in which the hire-purchaser has the right to use the items but does not acquire ownership of them until the contract is in force and the full amount due is paid for them. According to the ruling in Charanjit Singh Chaddha and others v. Sudhir Mehra, a hire-purchase agreement is an executory contract of sale and does not grant the hirer any real property rights prior to the fulfilment of the requirements for the property’s transfer to him. As a result, it’s possible that recovering the items in accordance with the terms of the contract does not constitute a crime.

The hirer hardly has the option to purchase the goods, and it is important to note that, despite having the right to use the goods during the term of the agreement, the hirer is not the legal owner of them. As a result, a hire purchase agreement is not a contract of sale but rather a contract of bailment. The Hire Purchase Act of 1972 governs all hire purchase financial companies in India. However, a Bill for making some adjustments was introduced in 1989, but it was never passed. The Indian Contract Act of 1872 and the Sale of Goods Act of 193 both apply to the two fundamental components of such a transaction: Bailment is covered by Chapter IX of the Indian Contract Act, which regulates finance agreements for the purchase of consumer durables including cars, computers, and home appliances like refrigerators and televisions. The Sale of Goods Act applies to this section of the hire purchase agreement. In its eighth report on the Sale of Goods Act, the law commission had proposed that a new law be developed to govern hire-purchase transactions. Due to the lack of appropriate regulations to govern such hire purchase transactions, provisions were provided by a separate statute known as the Hire Purchase Act, 1972.

History of Hire purchase Agreement

After the Industrial Revolution, sewing machines were the first consumer durables to be sold through hiring with the option to purchase. Soon after, these agreements were being formed for nearly all other consumer durables. Hire-purchase agreements received a new boost from the automobile industries’ explosive growth, with some advancement. Instead of the previous two parties, the owner and the hirer, there were now three parties involved in these transactions; owners sold their commodities to large financing corporations, who then supplied goods to the hirers. The first time these agreements were made in India was in the early 1900s by the Madras-based Auto Supply Company Ltd. (1920), which later went by the name Commercial Credit Corporation.

In the decades following World War II, hire-purchase agreements, which were used to finance commercial vehicles, underwent a substantial improvement. The government has established a number of committees, including the Masani and James Raj committee, that have acknowledged and supported the use of hire-purchase agreements in the road transportation industry and several other sectors. Although hire buy agreements are widely used in business and commerce, the legal component of them is unknown to most people, and they are frequently confused with other business transactions like sales and credit sales. It’s important to be able to distinguish between hire purchase agreements and sales and credit sales in order to comprehend their nature.

Laws relating to Hire Purchase Agreement in Different Countries


The Hire Purchase Act of 1967 is the primary legal framework that controls hire-purchase contracts in Malaysia. a law that took effect on April 11th, 1968, and was previously governed by the Contracts Act of 1950. Typically, the Malaysian market transacts in the types of hire buy agreements listed in the first schedule of the legislation, which covers all consumer products and motor vehicles (from invalid carriages, motorcycles, motor cars including taxi cabs and hire cabs, good vehicles on which the maximum permissible laden weight does not exceed 2540 kilograms, and buses including stage buses).


The term “hire purchase” is also known as “commercial hire purchase” or “corporate hire purchase” (CHP) in Australia, where corporations frequently use such agreements to finance the acquisition of commercial vehicles and business equipment. The “Uniform Conditional Sales Act,” which was proposed by the National Conference of Commissioners on Uniform State Laws in 1918, provided guidelines for hire-purchase agreements that were eventually approved by the majority of Australian states. Later, in 1959, the hire purchase statute for Australia was enacted. Subsequently, all of the states and territories accepted it. However, each state in Australia also has its own legislation regarding hire-purchase agreements, with the same goal as in India—to provide a legal framework that protects hirers against unfair and unjust contract terms.

United Kingdom

On the other hand, hire purchase agreements started to be used in Britain in the late nineteenth century, and rather than conducting the statistical analysis of instalment amount and its variations as required by the United Nations, the United Kingdom used to gather sparse data from various sources regarding hire purchases, which was useless at the time because there was no documentation of trades and theories. However, sporadic trade estimates show very rapid interwar growth, and the study further calculates that the volume of hire buy trading increased between 1918 and 1938. 38. Both consumers and producers used HP, although the latter was by far the more significant, accounting for between 84 and 87 percent of the revenue for the top HP finance companies. According to information made public by the Board of Trade in the late 1930s, hire buy agreements quickly began accounting for more than 70% of sales of automobiles and bicycles. Prior to the 1938 Act, the common law and the terms of the contract were the sole factors governing English HP agreements.

With almost little legislative opposition and few commercial complaints pertaining to anything other than its specifics, the 1938 Hire Purchase Act was approved by the Commons and Lords. ’26 Although traders eventually discovered ways to get around some of the safeguards provided by the Act, they were seen at the time as significant reforms. A copy of the agreement and written information on the cash price, the amount of the down payment, and the date of the instalments were some of the measures taken to guarantee that the hirer received the proper information. Some granted the buyer legal rights, such as the freedom from contractual obligations (subject to certain exceptions) if the goods were returned and half the purchase price had been paid, protection from repossession (absent a court order), and the right to have any legal proceedings heard in the buyer’s local court district. Other conditions prevented some abuses by vendors, such as the notorious ones that let the owner physically enter the hirer’s home to seize the products and exempted the retailer from obligation for any representations or promises made.

The next section will address the Hire Purchase Act as provided by the Indian constitution and how applicable it is in Indian trades after providing the following clarification regarding hire purchase agreements.

Features of Hire purchase agreement

  • It may happen that the items are hired and later it is discovered that the vendor is not entitled to those goods, thus one should be careful when choosing the asset and inquire about the rightful owner of that asset.
  • To ensure that the cumulative instalment amount does not exceed the actual value of the assets, it is crucial to keep track of it.
  • Additionally, a copy of the hire purchase agreement must be in the hirer’s possession.
  • Like any other agreement, a hire purchase agreement can be amended whenever it is convenient with the approval of both parties, the hirer and the hiree.
  • The hirer must ensure that the agreement specifies the hire fees and other payment terms in the manner in which he understands and interprets them, and that the terms are, to the extent practicable and acceptable, favourable.
  • Transparency is required, and the parties should be able to agree on the parameters of the agreements.
  • When purchasers are unable to pay for the items directly, such as when purchasing high-value electronic goods or automobiles, this payment method is typically employed.
  • Generally speaking, if we were to compare purchasing anything through a hire purchase agreement to purchasing it outright, the former would be more expensive.
  • In a hire purchase agreement, ownership passes to the buyer following complete payment for the specific item.

Working of a Hire Purchase Agreement

A hire purchase agreement allows the buyer a fair opportunity to acquire the item anytime it is practical for him while the agreement is in effect, which is somewhat similar to the idea of rent-to-own deals. Similarly, hire purchase benefits the buyer by giving them less credits and deferring the payment of pricey items that they would not otherwise be able to afford over time. However, the buyer cannot claim ownership of the item until he has paid the whole amount due, therefore it is not at all related to the extension of credit. Similar to Hire Purchase, the items that they hire are protected by the vendor because full payment has not yet been made, hence ownership is not originally transferred. The vendor needs confirmation that the item will be kept in excellent condition up until final payment is made. It is therefore one of the safest methods of transaction.

Contents of the Hire-Purchase Agreement

The following is a list of what a hire-purchase agreement must contain in accordance with Section 4 of this Act:

  • The cost of the products covered by this agreement’s hire-purchase clause.
  • The cost at which the hire-purchaser can buy the products outright.
  • The day the deal officially began.
  • The amount to be paid on each instalment, the number of instalments, the date, and the method for determining the date, the location, and the recipient of the payment.
  • The products covered by this agreement and how to recognise them.
  • Whether the lump sum amount is to be paid in cash or by check depends on the payment method. The hire-purchase agreement must state whether the part payment must be made in cash or by check if either option is required.

Types of Hire-Purchase Agreements

There are two different kinds of hire-purchase agreements:

  1. The financer, a third party who is involved in the first kind of agreement, buys the items from the seller on behalf of the hirer and delivers them to the hirer upon payment of the last instalment. In this case, the financier pays the seller for the items, owns the products outright, and has the right to recoup the purchase price from the hire-purchaser. In this situation, in the event of non-payment, the financier may confiscate the goods. Currently, hire-purchase arrangements in India are triangular, involving the seller, the financier, and the hire-purchaser. Most sellers work with the hire-purchaser to arrange a hire-purchase through the credit companies.
  2. In the second form of contract, the hire-purchaser enters into a direct agreement with the vendor, pays the purchase price, and upon completion of the final payment, becomes the legal owner of the items. If there is no payment, the seller has the right to confiscate the goods.

Conditions to be kept in mind while entering into a Hire-Purchase agreement

  1. It may happen that the items are being lent on hire by someone who is not the actual owner, so the hire-purchaser must verify the asset’s ownership before engaging into such a transaction.
  2. Keeping an eye on the cumulative instalment total because it cannot be higher than the asset’s true value.
  3. A copy of the agreement must be sent to both parties.
  4. Transparency is required, and both parties must accept the terms of the agreement.
  5. As long as both parties agree to the modification, the hire-purchase agreement can be amended as the parties see fit.


  • According to the provisions of the agreement, the agreement may be ended. The terms under which the agreement may be terminated are often stated in the agreement. Either by the hire-purchaser giving notice of termination or by the seller giving notice of termination in the event that the hire-purchaser breaches the agreement.
  • When the hire-purchaser buys the products from the seller after making all of the instalment payments, the arrangement can be dissolved through performance of the agreement.
  • The agreement also expires if the parties decide to part ways and sign into a new agreement while concurrently terminating the previous one.
  • Frustration may lead to the termination of the arrangement. when anything that happens after the agreement is formed makes it impossible to carry out the terms of the agreement. For instance, the products being destroyed without the hire- purchaser’s responsibility.

How Hire Purchase is different from Installment Sale?

  1. Contrary to an instalment sale, where ownership of the property passes to the buyer as soon as the contract is signed by all parties, under a hire purchase agreement, ownership passes to the buyer only once all needed instalments have been paid to the hire seller.
  2. A contract for sale is a payment schedule. However, under a hire purchase arrangement, the hire-purchaser and hire-vendor are related to one another as a bailee and a bailor, which prohibits the hire-purchaser from disposing of a property in any way. In this situation, the buyer has full rights to dispose of the property as he pleases.
  • The buyer takes ownership immediately after signing the contract, just like with instalment payments. Therefore, the buyer is responsible for making up for any damage to the products, but under a hire-purchase arrangement, the hire-purchaser is not responsible for making up for any damage to the goods, even if it was handled carefully because they are not yet the legal owners.
  1. The seller only has the ability to sue the buyer for the unpaid instalment amount and does not have the power to seize the property in the event of default in instalment payments. However, in a hire purchase arrangement, the hire-vendor has the right to reclaim the property in the event that the hire-purchaser defaults on payment of an instalment.
  2. If there is an instalment, the buyer cannot break the contract and must pay the entire amount due. However, under a hire-purchase arrangement, the hire-purchaser is not obliged to pay the remaining instalments but is free to end the contract if he so chooses and can return the products.

Parties to a Hire Purchase Agreement

In a hire-purchase arrangement, the contract is primarily between the hire-purchaser and the hire-vendor, while there may occasionally be involvement from the financer, a third party.

Duties of the Hire-vendor (owner)

  • The hire-vendor is responsible for timely and necessary delivery of the products, as well as for ensuring that they are received in excellent shape.
  • Owners are responsible for making sure that the goods match the description and the buyer’s preferences. The products should also correspond to the desired description.
  • The products that are to be contracted for the hire buy must be owned by the owner.
  • Both the hire-vendor and the hire-purchase parties must provide the essential details, including the dates of the transaction and a reminder for the payment of the balance.
  • The hired items must meet all requirements for fitting into the purpose for which they were hired and be of merchantable quality. The property should also be unencumbered by any debts. If there is a flaw in the property at all, it should be a little one that is obvious. For instance, in the case of Anoka vs. SCOA Warri, the hirer returned the vendor’s bike due to an engine fault. In this case, the court determined that the implicit provision of fitness for purpose would not apply because the deficiency is significant and difficult to identify.
  • While the vendor is required by law to refrain from interfering in any manner while the hirer is in possession of the good, the hirer is free to silence the possession at any time he chooses.

Duties of a hirer

  • The hirer must be present when taking the products that the owner has delivered; otherwise, he may be held liable for non-acceptance of the goods.
  • Without a doubt, the hirer is entitled to utilise the property as though it were his own, but only under the condition that he maintains it properly.
  • The hirer must return the products to the owner in exactly the same condition as when they were first delivered if the hire purchase agreement is found to no longer be lawful.
  • The hirer is obligated to pay all required instalments when they are due. In the matter of Animashawun v. CFAO, the owner seized the goods because the hirer had fallen behind on the instalment payments. The court ruled in the owner’s favour, holding that upon failure of the remaining instalments, the owner has the full right to reclaim the items.
  • The mere act of renting a good does not grant the hirer the authority to dispose of the delivered items by the owner, and this restriction continues until full payment is received.
  • The hirer must follow all rules pertaining to the items and the owner’s ownership of the goods, and this obligation continues until full payment has been made.

Merits of the Hire Purchase Agreement

  • Making payments for the goods is convenient. When the payments are paid in full, the hire-purchaser can claim ownership of the goods.
  • This type of transaction is advantageous to the seller as well because it boosts sales volume and revenue.
  • The original price and interest are included in the sum that the seller receives from the payments. The hirer will pay the instalment amount plus interest, which is computed in advance.
  • The products must be returned to the seller from the hire-perspective purchaser’s if there is a payment default on his part

Demerits of the Hire-Purchase Agreement

  • Compared to purchasing the asset outright, the hire-purchaser must pay more for the asset. The interest rate is included in the total price.
  • The majority of hire-purchase agreements have lengthy and strict terms.
  • Hiring never results in true ownership because the seller will take back the products in the event of default.
  • The asset has an artificial demand created by the hire-purchase agreement. Even if he cannot afford to buy the products, the hire-purchaser is tempted to do so.
  • Although he has the option to take the products back in the event of payment default, the seller also assumes a significant amount of risk under this method. There are few buyers and a low price for the used products.
  • It has been noted that the sellers don’t always have simple access to their items or timely payment of instalments. To reclaim the products, they must expend a lot of time and energy, which results in bitter legal disputes between the seller and the hire-purchaser.


The hire-purchase system is the greatest method to rent items that are often expensive to buy and subsequently own them if you so choose, but in reality, such agreements end up being more expensive because interest is added to the sum of the instalments. However, it actually costs you more because the instalment payment frequently includes interest and any outstanding balances for the specific piece.







Author: Arryan Mohanty,
Symbiosis Law School, Nagpur/Student

Leave a Comment