Difference between Lease Financing Vs Hire Purchase

Lease finance and hire purchase are the options for financing the assets. In lease financing vs hire purchase, both the terms vary from each other in many aspects viz. ownership of the asset, depreciation, rental payments, duration, tax impact, repairs and maintenance of the asset and the extent of finance.

Starting any business involves a lot of financial planning for the acquisition of fixed assets like land, plant, and machinery, etc. Most entrepreneurs are afraid of capital-intensive projects due to huge financial commitments. When large capital is present in the business, an entrepreneur wishes to spread his cost of acquisition of fixed assets over a longer period. A longer period would reduce per year commitment towards the cost of an asset.

The intention is to match the commitment with the revenue generated per year so that the payments are easily manageable without any cash flow mismatch.

Lease and Hire purchase is an exact solution to that kind of financial arrangement where the cash commitment is spread over the life of the asset and on top, lease financing does not even require any initial capital outflow also. Hence under the lease, the entrepreneur can use his capital for other working capital requirements.

Difference between Lease Financing Vs. Hire PurchaseLease

In simple words, a Lease is a financial contract between the business customer (user/lessee) and the equipment supplier (normally owner/lessor) for using a particular asset/equipment over a period of time against the periodic payments called “Lease rentals”.

The lease generally involves two parties i.e. the lessor (owner) and the lessee (user). Under this arrangement, the lessor transfers the right to use to the lessee in return for the lease rentals agreed upon. A lease agreement can also be flexible to meet the financial requirements of both parties.

A lease also acts as an alternative to financing business assets. There are many options for a finance manager to choose from. He can opt for equity finance, debt finance, term loan, hire-purchase or many others. All the means of financing differ from each other due to their different characteristics. There are some advantages and disadvantages of leasing.

Hire Purchase

Hire Purchase is a kind of installment purchase where the businessman (hirer) agrees to pay the cost of the equipment in different installments over a period of time. This installment covers the principal amount and the interest cost towards the purchase of an asset for the period the asset was in use. The hirer gets possession of the asset as soon as the hire purchase agreement is signed. He becomes the owner of the equipment after he does the last payment. The hirer has the right to terminate the agreement anytime before taking the title or the ownership of the asset.

Difference between Lease Financing Vs Hire Purchase

Ownership of the Asset

In a lease, ownership lies with the lessor. The lessee has the right to use the equipment and does not have the option to purchase. Whereas in hire purchase, the hirer has the option to purchase. The hirer becomes the owner of the asset/equipment immediately after he pays the last installment.

Depreciation

In lease financing, the depreciation is claimed as an expense in the books of the lessor. On the other hand, the depreciation claim is allowed to the hirer in the case of the hire purchase transaction.

Rental Payments

The lease rentals cover the cost of using an asset. Normally, it is derived from the cost of an asset over the asset life. In the case of hire purchase, installment is inclusive of the principal amount and the interest for the time period the asset was in use.

Lease Financing Vs Hire Purchase

Duration

Generally, lease agreements are for a longer duration and for bigger assets like land, property, etc. Hire Purchase agreements are mostly for shorter duration and cheaper assets like hiring a car, machinery, etc.

Tax Impact

In the lease agreement, the total lease rentals are shown as expenditures by the lessee. In hire purchase, the hirer claims the depreciation of the asset as an expense.

Repairs and Maintenance

Repairs and maintenance of the asset in the financial lease are the responsibility of the lessee but in an operating lease, it is the responsibility of the lessor. In hire purchase, the responsibility lies with the hirer.

The extent of Finance

Lease financing can be called the complete financing option in which no down payments are required but in the case of hire purchase, normally an amount of margin money is required to be paid upfront by the hirer. Therefore, we call it partial finance like loans, etc.

Businessmen can opt for the option of lease finance or the hire purchase but they should be analyzed properly as to how much the options suit the business requirement and situations.

A Summary of Tabular Presentation of Differences between Lease Fianacing Vs Hire Purchase

Points of Distinction Leasing Hire Purchase
OwnershipLessor is the owner until the end of the agreementHirer has the option of purchasing the asset at the end of the agreement
DurationDone for a longer durationDone for a shorter duration
DepreciationLessor claims the depreciationHirer claims the depreciation
PaymentsRental payments are the cost of using the assetPayments include the principal amount and the effective interest for the duration of the agreement
Tax ImpactLease rentals categorized as expenditure by the lesseeThe only interest component is categorized as expenditure by the hirer
The Extent of FinancingComplete financingPartial financing
Repairs and MaintenanceResponsibility of the lessee in the financial lease, and of the lessor in operating leaseResponsibility of the hirer
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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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22 thoughts on “Difference between Lease Financing Vs Hire Purchase”

  1. Thanks a lot for your effort..
    Q. Under hire purchase of aircraft is hirer demanded to submit bank guarsntees.or any collateral
    Rgds
    Shsms mr.

    Reply
  2. Sanjay, great article. The differences between lease finance and hire purchase are clearer to me now. Hire purchase means you get to own it at the end. You don’t write-off any depreciation for you don’t own it with the lease.

    Reply
  3. I am gonna prepare for exam and it is so use full thank you so much it is very easy way and good
    Thank you so much once again

    Reply
  4. Your style is so unique compared to many other people. Thank you for publishing when you have the opportunity, Guess I will just make this bookmarked.

    Reply
  5. If A company leased a machine for 3 years from a leasing Company B, making quarterly rental payments, with a view to exercising an option to buy it on 31 March 2020 with a nominal payment of $10. Is this a hire purchase or lease? If lease, Is it a financing lease or an operating lease?

    Reply
  6. Thanks a lot, be blessed and continue producing other better materials as much as you can. You done a big deal. I appreciate your work so much.

    Reply

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