Hire purchase is a financing mechanism in which a bank or a financial institution allows a borrower to purchase an asset and pay for it over a period of time. The borrower pays a down payment and agrees to make regular installment payments over a specified period until the full amount of the purchase price is paid. The bank retains ownership of the asset until the borrower has made the final payment. Here are some important aspects of hire purchase in banking:
- Interest Rate: The bank charges interest on the amount borrowed for hire purchase. The interest rate varies depending on the asset being financed, the creditworthiness of the borrower, and the duration of the payment plan.
- Asset Selection: Banks typically allow hire purchase for assets such as cars, two-wheelers, home appliances, and other consumer goods. The bank may have specific eligibility criteria for each asset.
- Down Payment: The borrower is required to pay a down payment, which is usually a percentage of the asset’s total cost. The down payment amount may vary depending on the asset, the borrower’s creditworthiness, and the bank’s policies.
- Installment Payment: The borrower makes regular installment payments over a specified period. The payment frequency may vary from monthly to quarterly or semi-annually. The payment amount includes both the principal amount and the interest.
- Ownership of Asset: The bank retains ownership of the asset until the borrower has made the final payment. Once the final payment is made, the bank transfers ownership of the asset to the borrower.
- Termination of Agreement: The hire purchase agreement can be terminated by either the bank or the borrower if either party fails to fulfill the terms and conditions of the agreement. The borrower can terminate the agreement by returning the asset to the bank, whereas the bank can terminate the agreement by repossessing the asset if the borrower fails to make the installment payments.
- Legal Aspects: The hire purchase agreement is a legal contract between the bank and the borrower. It outlines the terms and conditions of the agreement, including the payment schedule, interest rate, and termination clauses.
- Creditworthiness: Banks consider the creditworthiness of the borrower before approving a hire purchase loan. The borrower’s credit score, income, and repayment history are some of the factors that banks consider.
In conclusion, hire purchase is a financing mechanism offered by banks that allows borrowers to purchase assets and pay for them over a period of time. The bank retains ownership of the asset until the borrower has made the final payment. The interest rate, down payment, installment payment, ownership of the asset, termination of agreement, legal aspects, and creditworthiness of the borrower are some of the key aspects of hire purchase in banking.