Write short notes on Leasing Vs Hire Purchase
Answers
DIFFERENCE BETWEEN LEASE AND 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 the last installment is paid.
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 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, the normally an amount of margin money is required to be paid upfront by the hirer. Therefore, we call it a partial finance like loans etc.
Businessmen can opt option of lease finance or the hire purchase but they should be analyzed properly as to how much the options suits to the business requirement and situations