What is the Difference between hire purchase and a finance
Lease
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Answer Posted / sneha
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
finance company
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
by him.
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-
purchased.
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.
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