HIRE PURCHASE

1.0 INTRODUCTION
Hire purchases agreement are commonly known as H.P agreement in Malaysia and it is used by financial institutions such banks in Malaysia to fund the purchase of consumer goods, vehicles and other business equipment and industrial machinery. This is widely used by construction industry companies as a way to provide project finance. In Malaysia, The legislation governing hire purchase transactions is the Hire Purchase Act 1967, which came into force on 11 April 1968 after hire purchase, became popular in the acquisition of expensive consumer goods such as cars, business equipment and industrial machinery. Purchasing cars is the most common type of hire purchase agreement in Malaysia and the repayment could served up to 9 years from the date of agreement been executed.

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2.0 DEFINTION OF HIRE PURCHASE

As referring to the Oxford Dictionary page 506 (11th edition), the term of hire purchase is defined as a way of buying expensive goods by regularly paying small amounts over a period of time. This sentence means a buyer want to buy the expensive good which need a large amount of money with paying loan alternative. Other than that, Zolar (2011), describe the sentence of hire purchase as A method often used to purchase a vehicle. If you apply for hire purchase, you will be known as the tenant and the banking institution is the owner of the vehicle. Meanwhile based on Wikipedia, Hire purchase (abbreviated HP) is the legal term for a contract, in this person usually agrees to pay for goods in parts or a percentage at a time. It is also called closed-end leasing. In other words, when a buyer cannot afford to pay the asked price good and property as a lump sump, the buyer can conduct hire- purchase contracts which allow paying for monthly rent with pay a percentage as a deposit. For example when involve with hire purchase agreement of vehicles finance: 1. The supplier sells the goods to the finance house. 2. The supplier delivers the goods to the customer who will eventually purchase them. 3. The hire purchase arrangement exists between the finance house and the customer. The vehicle finance will always insist that the hirer should pay a deposit towards the purchase price. The size of the deposit will depend on the finance companies and institution policy and its assessment of the hirer such as Maybanks offer a low interest for Honda vehicles with 2.38% per annum .This is in contrast to a finance lease, where the lessee might not be required to make any large initial payment.

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3.0 CRITERIA OF HIRE PURCHASE AGREEMENT

3.1 Features Hire Purchase Agreement
1. Under hire purchase system, the buyer takes possession of goods immediately & agrees to pay the total hire purchase price in instalments 2. Each instalments is treated as hire charges 3. The ownership of goods passes from buyer to seller on the payments of the instalments 4. In case the buyer makes any default in payments of any instalments the seller has right to repossess the goods 5. Normally a deposit is requested i.e. 10% 6. Funding Period- periods are normally between 3-9 years. 7. Rather than pay for the asset outright using cash, it can often make sense for businesses to look for ways of spreading the cost of acquiring an asset, to coincide with the timing of the revenue generated by the business. 8. The most common sources of medium term finance for investment in capital assets are Hire Purchase and Leasing. 9. Leasing and hire purchase are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments.

3.2 Content in the Hire Purchase Agreement

Hire purchase agreement must be made in writing and signed by both parties which the seller and the customer. If any of the below requirements have not been complied with, the hirer can institute a suit for getting the hire-purchase agreement will rescinded. Hence, every hire-purchase agreement shall state: 1. The hire-purchase price of the goods to which the agreement relates with clear descriptions 2. The cash price of the goods, which mean the price at which the goods may be purchased by the hirer for cash 3. The monthly instalments (most states require that the applicable interest rate is disclosed and regulate the rates and charges that can be applied in HP transactions) and 4. The amount of the deposit must be paid 5. A reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period). 3|Page

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3.3

The Hirer s Rights

The hirer usually has the following rights: 1. To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate (each jurisdiction has a different formula for calculating the amount of this rebate) 2. To return the goods to the owner this is subject to the payment of a penalty to reflect the

owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value 3. With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating 4. Where the owners wrongfully repossess the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost.

3.4

The Hirer s Obligations

The hirer usually has the following obligations: 1. To pay the hire instalments 2. To take reasonable care of the goods (if the hirer damages the goods by using them in a nonstandard way, he or she must continue to pay the instalments and, if appropriate, compensate the owner for any loss in asset value) 3. To inform the owner where the goods will be kept. 4. A hirer can sell the products if, and only if, he has purchased the goods finally or else not to any other third party.

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3.5

The Owner Right s

The owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement. This entitles the owner: 1. To forfeit the deposit 2. To retain the installments already paid and recover the balance due 3. To repossess the goods (which may have to be by application to a court depending on the nature of the goods and the percentage of the total price paid) 4. To claim damages for any loss suffered.

3.6

Hire Purchase in the Construction Industry

Nowadays, the construction industry has been developed rapidly in Malaysia. It can be prove

as many projects have been done by the government. This situation can give opportunities to the construction team especially to the contractors. Thus, the contractor usually construct the project will depend to their own source of finance. Meanwhile, not of all contractors have sufficient money to have their own plant and machineries due to construct the project. Hence, hire-purchase is the best way to provide the project finance and it give additional benefits in the forms of low deposit and competitive interest rate. Based on Edward & John (1984) statement, it clearly says that all of contractors need to hire the machineries first as long as their financial will be covered later. The supply of plant, machinery, scaffolding, office equipment and cars whose legal title remain the property of the financier (finance company) and where the borrower is regarded as hirer From this we can see that there are three parties involve on that situation. There are: y y y The Seller/Trader Has good and services The Buyer/Hirer Person whose agree the term agreement of hire purchase The Financier The institutions who willing to give loan to the buyer due to purchase good and service

As a result, the hire purchase can help to the contractor to solve their own sufficient finance.

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4.0 CALCULATION OF HIRE PURCHASE

The boss of Oricon Sdn. Bhd Company wants to buys the machineries in order to help the construction project. The following is the criteria of Oricon Company want to hire. He want to know the annually payment by monthly including interest rate.

Item: Price: Deposit: Interest: Period of Loan: Installment/Monthly:

Honda Civic (Registration no. BEQ 5287) RM70, 000.00 RM7,000.00 2.38% 9 years ?

Hire Purchase = Total Installment + Deposit + Other amounts Calculation: Deduct by Amount of Deposit = RM70, 000.00 RM7, 000.00 = RM63, 000.00 Fixed Charge Rate = 2.38 % x 9 years = 21.42% Total amount including Interest = RM63, 000.00 x 1.2142% = RM76, 494.60 Monthly Payment = RM76, 494.60 / 12(9)

= RM708.28

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5.0 ADVANTAGES OF HIRE PURCHASE

The Advantages of Hire Purchase Agreements to the consumers: 1. Spread the cost of finance Whilst choosing to pay in cash is preferable, this might not be possible for consumer on a tight budget. A hire purchase agreement allows a consumer to make monthly repayments over a pre-specified period of time

2.

Interest-free credit Some merchants offer customers the opportunity to pay for goods and services on interest free credit. This is particularly common when making a new car purchase or on white goods during an economic downturn

3.

Higher acceptance rates The rate of acceptance on hire purchase agreements is higher than other forms of unsecured borrowing because the lenders have collateral

4.

Sales A hire purchase agreement allows a consumer to purchase sale items when they aren't in a position to pay in cash. The discounts secured will save many families money

5.

Debt solutions Consumers that buy on credit can pursue a debt solution, such as a debt management plan, should they experience money problems further down the line.

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6.0 DISADVANTAGES OF HIRE PURCHASE

The Disadvantages of Hire Purchase Agreements to the consumer

1. Personal debt A hire purchase agreement is yet another form of personal debt it is monthly repayment commitment that needs to be paid each month

2. Final payment A consumer doesn't have legitimate title to the goods until the final monthly repayment has been made

3. Bad credit All hire purchase agreements will involve a credit check. Consumers that have a bad credit rating will either be turned down or will be asked to pay a high interest rate

4. Creditor harassment Opting to buy on credit can create money problems should a family experience a change of personal circumstances

5.

Repossession rights. A seller is entitled to 'snatch back' any goods when less than a third of the amount has been paid back. Should more than a third of the amount have been paid back, the seller will need a court order or for the buyer to return the item voluntarily.

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7.0 CONCLUSION
In conclusion, based on hire-purchase loans are a very helpful person or a company that requires financial resources. With these hire-purchase loans, one can use the goods and services directly after agreeing to the terms and conditions contained in the hire purchase agreement between the banks and producers. Next, in the field of construction industry, the reasonable needs of financial resources are the contractor. The contractor should have sufficient financial resources to carry out their projects, especially plant and Machineries related problems. With the hire-purchase loans was that, it is indirectly helping contractors are financially disadvantaged to have an own machinery and equipment. Therefore, it would make the work of contractors can be implemented in a timely manner without having the worry associated with their machinery and equipment. Thereby, it is strongly encouraged the contractor to make a hire-purchase loans in advance and installment payments will be made every month in order to protect the quality of work and financial resources.

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8.0 REFERENCES
1. BOOKS y Khairani Ahmad (2009), Construction Economics y John Simpsons and Edmund Weiner (1989), The Oxford English Dictionary (11th Edition)

2. IINTERNET SOURCES y www.wikipedia.com/hirepurchase y Maybank, Hire Purchase Loans retrieved from http://www.maybank2u.com.my/, on 10th January 2012 y RHB Bank, Hire Purchase Loans retrieved from http://www.rhb.com.my/loans/hirepurchase/hp_hire_main.html, on 10th January 2012 y The Hire-Purchase Act 1972 retrieved from http://www.vakilno1.com/bareacts/hirepurchase, on 10th January 2012 y PROTONOMY HOSTING retrieved from Advantages & Disadvantages of hire purchase, http://www.proton.my/index.htm, on 10th January 2012

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9.0 APPENDIX

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