Financial Accounting · Hire Purchase and Installment Sale Transactions

Hire Purchase Meaning, Features and Key Terms

Updated 10 October 2026 · Fact-checked

Hire purchase is an agreement where the buyer (hirer) gets possession of goods at once, pays the price in installments, and becomes owner only after paying the last installment. Hire purchase price = cash price + interest. To solve questions, identify cash price, down payment, installments and interest.

Understand Hire Purchase Basics and Key Terms

A hire purchase agreement lets you use goods now and pay for them over time. The seller is called the hire vendor. The buyer is called the hirer or hire purchaser. The hirer takes possession on day one, but ownership stays with the vendor until the last installment is paid.

The legal basis is a contract. In India, hire purchase is treated as a bailment (the hirer holds the goods for use) combined with an option to buy. The Hire Purchase Act, 1972 exists but has not been brought into force. So the agreement's own terms, together with the Indian Contract Act, 1872 and the Sale of Goods Act, 1930, govern the transaction. The key point for exams: the hirer is a bailee until the option to buy is exercised.

The main terms are these. Cash price is the price at which the goods could be bought for immediate cash. Down payment (initial payment) is the amount paid on signing the agreement. Installments are the later periodic payments, each including part principal and part interest. Hire purchase price is the total the hirer pays, including the down payment. It equals the cash price plus interest (the financing charge).

Key features: possession passes at the start; ownership passes on the last payment; legally, the installments are hire rent until the option to buy is exercised; if the hirer defaults, the vendor can repossess the goods and usually keep the amounts already paid; and the hirer can usually return the goods without paying the remaining installments, though earlier payments are lost.

For accounting, the legal form gives way to substance. The hirer capitalizes the asset at its cash price and charges depreciation on it. The interest part of each installment is charged separately as an expense. So the hirer does not treat installments as plain rent in the books, even though the contract calls them hire rent until the option is exercised.

Hire purchase differs from installment sale mainly in the legal position on ownership. In installment sale, ownership passes at the time of sale, so the buyer owns the goods at once. The seller's usual remedy on default is to sue for the unpaid price, as ownership has passed to the buyer. In the books, both the hirer and the installment buyer capitalize the asset at cash price and charge depreciation and interest. The difference is legal (title and repossession), not in the accounting.

In leasing, the lessee pays lease rentals for use and the lessor generally keeps title. A lease does not generally transfer ownership, though a finance lease may include a purchase option or transfer title at the end. In hire purchase, ownership passes on payment of the last installment.

Under AS 19, a lease is classified as a finance lease or an operating lease by risks and rewards, not just by legal title. Under Ind AS 116, a lessee uses a single right-of-use model for all leases (with limited exemptions). Only the lessor classifies leases as finance or operating by risks and rewards.

Key rules to remember

Hire purchase price: Hire purchase price = Cash price + Total interest; Total interest is the financing charge over the whole agreement.
Hire purchase price from payments: Hire purchase price = Down payment + Sum of all installments; Use this when the question gives the payment schedule.
Total interest: Total interest = Hire purchase price − Cash price; Interest is usually spread over installments; the later calculation topic covers how.
Ownership rule: Hire purchase: ownership passes on last installment. Installment sale: ownership passes at sale.; This is the core difference examiners test.
Installment sale price: Installment price = Cash price + Interest, ownership with buyer immediately; The buyer owns the goods from day one.

How to solve Hire Purchase Basics and Key Terms questions

Use this method for any theory or numerical question on hire purchase basics.

1Read the question and mark whether it is hire purchase, installment sale or lease. Look for who owns the goods and when ownership passes.
2List the given figures: cash price, down payment, number and amount of installments, interest rate.
3Compute hire purchase price as down payment plus all installments, or cash price plus interest.
4Find total interest as hire purchase price minus cash price.
5For comparison questions, use a point-by-point layout: ownership, possession, risk, repossession, legal nature, default.
6For term-definition questions, define the term, give a one-line illustration with figures, and state how it links to the hire purchase price.
7Check that the answer is consistent: hire purchase price must exceed cash price when interest is charged.

Quickest way: Ownership test and price identity

When to use it: Use this for MCQs and short notes where you have only a minute or two.

Ask first: does ownership pass at the start or at the last installment?
If at the start, it is an installment sale. If at the last installment, it is hire purchase.
If the user pays rentals and the lessor keeps title, think lease.
For numbers, write: Hire purchase price = down payment + installments, then subtract cash price to get interest.
Eliminate options that mix up the terms, such as cash price greater than hire purchase price.

Common mistakes in Hire Purchase Basics and Key Terms

Saying ownership passes to the hirer at the start of a hire purchase agreement.
Possession passes at the start, so students assume ownership does too.
Fix: Separate possession from ownership. Ownership passes only on the last installment (or exercise of the option).
Treating the down payment as separate from the hire purchase price.
Students add only the installments.
Fix: Always include the down payment: hire purchase price = down payment + all installments.
Confusing hire purchase with installment sale in the comparison answer.
Both involve payment in installments, so they look alike.
Fix: Lead with ownership, then add the default position. In installment sale, ownership has passed, so the seller's usual remedy is to sue for the unpaid price.
Calling hire purchase a lease or using the term finance lease as a synonym.
Both involve paying for use of an asset.
Fix: State that a lease generally does not transfer ownership, though a finance lease may include a purchase option or transfer title. In hire purchase, ownership passes on payment of the last installment.
Claiming the Hire Purchase Act, 1972 governs all agreements today.
The Act's name suggests it is in force.
Fix: Write that the agreement is governed by the contract terms and general contract and sale of goods law, as the 1972 Act has not been brought into force.
Taking interest as the whole difference in every case without checking the data.
Students skip the cash price.
Fix: Compute interest as hire purchase price minus cash price and check your answer against the given rate if one is stated.

Worked examples

Example 1

Rohan Traders buys a machine under a hire purchase agreement. The cash price is ₹2,40,000. Rohan pays ₹60,000 on signing and three yearly installments of ₹75,000 each. Find the hire purchase price and the total interest.

Show the solution

Down payment = ₹60,000.
Installments = 3 × ₹75,000 = ₹2,25,000.
Hire purchase price = ₹60,000 + ₹2,25,000 = ₹2,85,000.
Total interest = ₹2,85,000 − ₹2,40,000 = ₹45,000.

Answer: Hire purchase price is ₹2,85,000 and total interest is ₹45,000.

Example 2

Distinguish between hire purchase and installment sale in four points.

Show the solution

Ownership: in hire purchase, ownership passes to the hirer only on payment of the last installment. In installment sale, it passes to the buyer at the time of sale.
Nature of contract: hire purchase is a bailment with an option to buy. Installment sale is an agreement of sale with price payable in parts.
Default: the vendor can repossess the goods in hire purchase. In installment sale, the seller's usual remedy is to sue for the unpaid price, as ownership has passed to the buyer.
Termination: the hirer may terminate the agreement by returning the goods, but loses the amounts paid. A buyer who owns the goods under installment sale has no such statutory right of termination.

Answer: The two differ mainly in when ownership passes, and so in the vendor's rights on default, the hirer's right to terminate, and the nature of the contract. In the books, both capitalize the asset at cash price and charge depreciation and interest.

Exam tips

Write ownership first in any comparison answer. It is the point examiners look for.
In numerical MCQs, compute the hire purchase price as down payment plus installments, then subtract the cash price for interest.
Use a point-wise layout with numbered points in written answers so each point earns a mark.
Do not quote section numbers of the Hire Purchase Act, 1972 unless you are certain, and note that it is not in force.
For leasing comparisons, mention ownership, purchase option, and risk and reward, and follow the accounting standard named in the question.

Practice questions from Hire Purchase and Installment Sale Transactions

Hire Purchase Basics and Key Terms in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA IntermediateLease Financing and Hire Purchase

Hire Purchase Basics and Key Terms: frequently asked questions

What is the difference between hire purchase and installment sale?

In hire purchase, the hirer gets ownership only after the last installment. In installment sale, ownership passes at the time of sale. So the vendor can repossess goods in hire purchase, while in installment sale the seller's usual remedy is to sue for the unpaid price, as ownership has passed to the buyer.

What is the difference between cash price and hire purchase price?

Cash price is what you would pay to buy the goods immediately. Hire purchase price is the total you pay under the agreement, including the down payment and interest. It is higher than cash price by the interest.

Is hire purchase the same as leasing?

No. A lease gives you the right to use an asset for rentals, and it generally does not transfer ownership, though a finance lease may include a purchase option or transfer title. In hire purchase, ownership passes to the hirer on payment of the last installment.

What law governs hire purchase in India?

The Hire Purchase Act, 1972 has not been brought into force. So the terms of the agreement, along with the Indian Contract Act, 1872 and the Sale of Goods Act, 1930, apply.