HIRE PURCHASE::buying after leasing, leasing with the
option to buy at the end of the lease period
Finance lease::A finance lease effectively allows a firm to
finance the purchase of an asset, even if, strictly
speaking, the firm never acquires the asset. Typically, a
finance lease will give the lessee control over an asset
for a large proportion of the asset's useful life,
providing them the benefits (and risks) of ownership.
Hire purchase is a purchase of an asset in which customer
makes down payment and finance rest of the ammount through
financial insti or bank.On rest of the unpaid amnt he pays
interest at a certain pre-described rate of interest.After
making complete payment the assest becomes the legal right
Lease on the other hand is an agreement of using asset for
certain period and paying rent on it at a pre-described
rate of interest.It is a temorary acuiring of an asset just
to use it.Generally Pvt schools are bulid on lease land.
Interest on lease is fully exemt from tax.
hire purchase : in the hire purchase all the below
conditions should be there is not required.
Lease : The lease period covers a substantial part of its
At the inception of the lease the present value of the
rentals is almost equal to the fair value of the asset as
on that date.
The leased asset is a specialized asset which cannot be
used by anyone
other than the lessee without major modifications
1.Ownership: The lessor is the owner of the lessee is
entitled to the use of the leased asset/equipment only in
case of lease financing. The ownership is never transferred
to the user. In contrast the ownership of assets passes on
to the user, in case of hire-purchase finance, on payment
of last installment; before the payment of last
installment, the ownership of the assets vests in the
2.Depreciation: The depreciation on the asset is charged in
the book of the lessor in case of leasing while the hirer
is entitled to the depreciation shield on the assets hired
3.Magnitude: Both lease finance and hire-purchase are
generally used to acquire capital goods. However, the
magnitude of funds involved in the former is very large,
for example the purchase of aircrafts, ships, machinery,
air-conditioning plants and so on, the cost of acquisition
in hire purchase is relatively low. Hence automobiles,
office equipments, generators etc, are generally hire-
4.Extent: leasing financing is invariably 100% financing.
It requires no margin money or immediate cash down payment
by the lessee. In a hire-purchase transaction typically a
margin equal to 20-25% of the cost of the equipments is
required to be paid by the hirer.
5.Maintenance: The cost of maintenance of hired asset is to
be borne, typically by the hirer himself. In case of
finance lease only, the maintenance of the leased asset is
the responsibility of the lessee. It is the lessor who has
to bear the maintenance cost in an operating lease.
6.Tax benefit: The hirer is allowed the depreciation claim
and finance charge and the seller may claim any interest on
borrowed funds to acquire the asset for tax purposes. In
case of leasing, the lessor is allowed to claim
depreciation and the lessee is allowed to claim the rentals
and maintenance cost against taxable income.
There are two types of lease - Finance lease and operating
lease. Most of the answers submitted here are difference
between hire purchase and operating lease. On the face
there is not much difference between hire purchase and
The difference in angle of payment of money is as follows:
Hire purchase : down payment can be part of cost of asset
or even 0.
Fianance lease: Not Applicable (N.A)
Operating lease: N.A
Ownership of the Asset: In lease, ownership lies with the lessor. The lessee has the right to use the equipment and does not have an 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 lessor. On the other hand, the depreciation claim is allowed to the hirer in 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 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 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 financial lease is 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.
Extent of Finance: Lease financing can be called the complete financing option in which no down payments are required but in case of hire purchase, the normally 20 to 25 % margin money is required to be paid upfront by the hirer. Therefore, we call it a partial finance like loans etc.
The option of lease finance or the hire purchase can be opted by the businessmen but they should be analyzed properly as to how much the option suits to the business requirement and situations.