Hire Purchase VS Finance Leasing

Businesses planning to acquire certain assets have financing options that can bring them substantial benefit or drawbacks depending on their purpose and financial situation. It is important to determine the purpose of the asset to the business and analyze the impact of the purchase to the business cash flow and net profit. Ultimately, every businessman’s goal is to conserve capital, so the idea of spreading the cost over a long period is highly essential. Hire Purchase and Financial Lease offer this flexibility and convenience to entrepreneurs and companies alike.

What is a Hire Purchase?

Hire purchase is a financing option wherein the possession of the asset is transferred to the hire purchaser under an agreement with the hire vendor. The hirer pays the total amount of the asset in installments over a specified period. The installment includes the principal amount of the asset and interests.Transfer of ownership to the hire purchaser is possible after the fulfillment of the last installment. Conversely, the hire purchaser has the option to terminate the agreement anytime before the transfer of ownership.

What is a Financial Lease?

Financial Leasing is an agreement permitting the lessee to utilise the asset of the lessor in exchange of periodic payments called lease rentals. The lessor retains legal ownership of the asset during the entire leasing period. However, the lessee enjoys the benefits and takes control of the asset and assumes the risk involved in the economic ownership of the asset.

Hire Purchase vs. Financial Lease

Relationship in Agreement

In hire purchase agreement, the relationship between the parties will be that of owner/vendor and hirer, while in finance lease, it will be between the lessor and the lessee.

Ownership Transfer

In hire purchase agreements, the ownership is transferred to the purchase hirer after the final installment of the asset has been completed while in financial lease, there is only a possibility of ownership when the lease period ends. The lessee may be given the option to own the asset by paying a diminutive amount. The ownership may or may not be transferred eventually.

Depreciation Benefit

In finance leasing, the lessor derives the depreciation benefit, while in hire purchase, it is the hire purchaser who gets the depreciation benefit for income tax.

Duration

The duration of finance leasing is generally longer than hire purchase. Usual assets utilized through finance leasing are land, buildings and properties; while cars, equipment, trucks and lorries are usually done through hire purchase.

Payments

A downpayment is obligatory in a hire purchase. Then, the rest of the cost is paid on installment basis which includes the principal amount and the interest. In finance lease, there is no downpayment required to be made by the lessee and has to pay the cost of the utilization of the asset only.

Payment Defaults

Defaults in payments permit the owner to seize the possession of the asset from the hirer. Upon the termination of the finance lease agreement, the asset can be sold to the lessee at a particular value.

Repairs and Maintenance. In hire purchase, repairs and maintenance lies with the hirer. In finance lease, the responsibility lies with the lessee.

If you still find yourself lost about which plan is best for you, Total Funding can help you decide. Talk to us today and let’s find a solution that will be beneficial in the growth of your business.