Understanding the Difference between Hire Purchase and Lease
When it comes to financing a car, two popular options that are commonly used are hire purchase and lease. Each option offers unique benefits and drawbacks, so it is important to understand the difference between the two to make an informed decision.
Hire Purchase
Hire purchase is a financing method that allows you to purchase a car through regular payments over a fixed term. With hire purchase, the car is owned by the finance company until the final payment is made. Once the final payment is complete, the ownership of the car is transferred to you.
One of the main benefits of hire purchase is the predictability of payments. The payment schedule is fixed, so you know exactly how much you will be paying and for how long. Additionally, there are often no mileage restrictions, so you can drive the car as much as you want without any additional fees.
However, because the finance company owns the car until the final payment, you cannot sell or modify the car until you have paid off the loan in full. There may also be penalties for early repayment, which can limit your flexibility.
Lease
Leasing is another popular financing option for cars. With a lease, you are essentially renting the car for a fixed term, typically two to four years. At the end of the lease term, you can either return the car, purchase it outright, or lease another car.
One of the benefits of leasing is that the monthly payment is often lower than with hire purchase. This is because you are only paying for the depreciation of the car over the term of the lease, rather than the entire cost of the car. Additionally, you can upgrade to a new car every few years without having to worry about selling your old car.
However, there are some drawbacks to leasing. Most leasing contracts come with mileage restrictions, so if you go over the allotted mileage, you will have to pay additional fees. Additionally, you are not building any equity in the car, as you do not own it. This means that you are essentially paying for the use of the car without any long-term financial benefit.
Conclusion
Both hire purchase and leasing are viable options for financing a car. When deciding between the two, it is important to consider your individual needs and priorities. Hire purchase may be the better option if you want to own the car outright and have more flexibility in terms of modifying or selling the car. Leasing may be the better option if you are looking for lower monthly payments and like the idea of upgrading to a new car every few years. Either way, it is essential to carefully read and compare terms and conditions of both options before making your final decision.
Table difference between hire purchase and lease
| Hire Purchase | Lease |
|---|---|
| Ownership passes to the buyer at the end of the contract after all payments are made. | Ownership remains with the leasing company. |
| The buyer pays interest and principal over the term of the contract. | The lessee pays a fixed monthly payment over the term of the lease. |
| The buyer is responsible for maintaining and servicing the asset. | The leasing company is responsible for maintaining and servicing the asset. |
| The buyer has the option to sell or trade-in the asset before or at the end of the contract. | The lessee has the option to return the asset, renew the lease or purchase the asset at the end of the contract. |
| The buyer has to make a down payment or deposit to start the contract. | The lessee may not have to make any down payment or deposit to start the lease. |