Hire Purchase Agreement

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Hire Purchase Agreement

A Brief Introduction of Hire Purchase Agreement

A hire purchase agreement is a contract wherein a person can purchase goods on an installment basis instead of paying the entire money upfront. At the end of the term of the contract, he has the option of purchasing the goods if all the installments have been paid. In hire purchasing, payment for a product is made in installments while using it for the period mentioned in the contract. Once all the installments and the interest amount has been successfully paid, the ownership of the goods is transferred to the person.

However, there is no obligation on the person to purchase the goods; it is merely an option. In short, the nature of hire purchase contract is “buy now, pay later.”

Who Takes the Hire Purchase Agreement?

This agreement is entered between the person who is the owner of the goods (known as the “seller”) and the person who wishes to hire it while having the option to purchase it as well (known as the “buyer” or the “hirer”).

Purpose of the Hire Purchase Agreement

The purpose of the agreement is to allow a person to purchase an expensive product by paying for it through regular installments instead of paying a lump sum amount. This can be very helpful in multiple situations where the buyer is unable to pay a huge amount to purchase a certain item, or he does not have access to a line of credit to pay for the same.

In case the buyer is not able to make the complete payment, the seller can take possession of the goods. The buyer acquires ownership of the goods only after the last installment has been paid. It is treated as a contract of bailment as the buyer has possession of the goods. A hire purchase definition can be viewed in the form of a rent-to-own transaction. The term of hire purchase agreements is usually between two to five years.

Contents of the Hire Purchase Agreement

The contents of this agreement could be referred to from a hire purchase agreement sample. Some of them are as follows:

  • The parties to the agreement must be identified clearly with their names, addresses, and contact information.
  • The goods that are the subject of the agreement must be described in detail, and the term of the hire of the product should be included in the agreement.
  • The value of the goods i.e., the price of the product, must be laid down. Additionally, the hire purchase price should be mentioned in the agreement. It is important to include the number of installments and the amount of each installment in the agreement itself to avoid any dispute in the future.
  • The contract should also mention the penalties that will become applicable in the case of late payment on behalf of the buyer.
  • The actions that shall be considered a breach of the agreement and possible remedies for it must also be provided.
  • Also, the parties can opt to have an arbitration clause in the agreement for the resolution of any dispute that may arise about the terms of the agreement.

How to Draft the Hire Purchase Agreement?

The following are the steps to follow while drafting an agreement of hire purchase:

  • The seller will decide the conditions for the hire purchase transaction. The parties may negotiate among themselves the price, the installments that will be payable, and the interest rate that will become applicable to the price.
  • Once the negotiations are concluded, the terms that have been agreed to must be laid down in the agreement in a clear, precise manner.
  • The agreement must also have a provision in case the buyer wishes to purchase the goods before the term of the agreement comes to an end.
  • The agreement must be thoroughly reviewed by both parties.
  • It must then be signed by both parties to make it a legally binding agreement.

Negotiation Strategy

  • The negotiations in a hire purchasing transaction will revolve around the hire purchase price and the interest rate that will be applicable.
  • The agreement should be such that it benefits both parties equally and does not take undue advantage of the buyer. The strategy can allow you to get a loan of more than 90% of loan on the agreement.

Benefits and Drawbacks of the Hire Purchase Agreement

The following are the benefits:

  • Through this agreement, small businesses or startups can purchase expensive products or machinery on a purchase system. Businesses that require expensive machinery—such as construction, manufacturing, plant hire, printing, road freight, transport, and engineering—may use hire purchase agreements, as could startups that have little collateral to establish lines of credit.
  • This agreement protects the seller as the ownership in the goods is only transferred once the entire payment has been made and not at any time before that.


  • A drawback of this agreement is that the buyer ends up paying a higher cost for the goods as the interest rate can be quite high.
  • Additionally, if the buyer fails to pay all the installments, the seller will retake possession of the goods, and the buyer will lose the entire amount paid by him.

What Happens in Case of Violation?

In case there is a breach of the agreement by the buyer(1), the seller has the right to terminate the agreement and retake possession of the goods. If for any reason, it is not possible to take possession of the goods, the seller can institute a case against the buyer for damages.

In case the buyer defaults on payment of an installment or makes a late payment, a penalty will be levied on him as per the terms of the agreement. If any damage is caused during the hire of to the goods or if it is lost, the buyer will have to compensate the seller for such loss caused to him during the agreement.

This type of contract can prove to be very useful for companies that cannot avail enough credit to purchase expensive equipment or goods that are required for their business. Through this contract, the goods can be purchased on an installment basis, which can be feasible for any kind of businesses.