Differences between Hire Purchase and Leasing There are a number of differences between hire purchase and leasing.
The lease generally involves two parties i. Under this arrangement, the lessor transfers the right to use to the lessee in return of the lease rentals agreed upon.
A lease agreement can be made flexible enough to meet the financial requirements of both the 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 financedebt 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 is utilized.
The hirer gets the possession of the asset as soon as the hire purchase agreement is signed. He becomes the owner of the equipment after the last payment is made. The hirer has the right to terminate the agreement anytime before taking the title or the ownership of the asset.
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. 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 hire purchase transaction. Rental Payments The lease rentals cover the cost of using an asset.
Normally, it is derived with 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 is utilized.
Duration Generally, lease agreements are done for longer duration and for bigger assets like land, property etc. Hire Purchase agreements are done 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 expenditure by the lessee. In hire purchase, the hirer claims the depreciation of 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 operating leaseit is the responsibility of the lessor.
In hire purchase, the responsibility lies with the hirer. Therefore, we call it a partial finance like loans etc.Differences between Hire Purchase and Leasing There are a number of differences between hire purchase and leasing. They are given below 1.
Transfer of ownership In Hire purchase, the agreement is entered for the transfer of ownership after a fixed period.
But in Leasing it is only in financial lease, the ownership will get transferred. While in operating lease. Personal contract hire is a type of lease for personal customers. It consists of an upfront payment followed by regular monthly payments over a fixed period of time.
Both finance lease, as well as hire purchase, allows spreading the cost of acquiring the asset, which is convenient for a company.
The company gets to use the asset for a long period of time making regular payments, as if the asset has been taken on hire or rent.
Jul 07, · Hire Purchase vs Leasing Should you stumble upon the dilemma of choosing between leasing and hire purchase, you must first understand the situation you are in and consider the subtle differences of each.
When you do a hire purchase, you actually purchase what you pay for. To be specific, you are buying the opportunity5/5(2).
Example: hire purchase agreement entered into before 1 July Albert's Abattoir (Albert) is registered for GST and reports GST quarterly. On 10 June , Albert buys a freezer from the Friendly Freezer Store (Friendly) for $33, through a hire purchase agreement. Lease finance and hire purchase are the options of financing the assets.
These options 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.