Understanding the Difference between Lease and Hire Purchase
Lease and hire purchase are two of the most popular financing options for businesses and individuals looking to acquire assets. While both of these financing methods allow you to spread the cost of the asset over a period of time, there are some key differences between the two that you need to know. In this article, we will explore the difference between lease and hire purchase.
What is Lease?
A lease is a type of contract that allows you to use an asset for a specified period of time in exchange for regular payments. In other words, you are paying to use the asset rather than owning it outright. At the end of the lease term, you have the option to return the asset or extend the lease. Leasing is often used for things like cars, equipment, and property.
The main advantage of leasing is that it can be a cost-effective way to acquire an asset without having to commit to a large upfront payment. Additionally, maintenance and servicing costs are often included in the lease agreement, which can be a significant benefit.
What is Hire Purchase?
Hire purchase is a financing option that allows you to acquire an asset without the need for a large upfront payment. With hire purchase, you pay a deposit and then make regular payments over a period of time. Once all payments have been made, you own the asset outright.
Unlike leasing, you are responsible for any maintenance and servicing costs when you own the asset. However, the advantage of hire purchase is that you have the option to purchase the asset at the end of the payment period, making it a good option for assets that you plan to keep for a long time.
The Differences
The main difference between lease and hire purchase is the ownership of the asset. With leasing, you are paying to use the asset, but you never own it outright. With hire purchase, you eventually own the asset once all payments have been made.
Another key difference is the responsibility for maintenance and servicing costs. With leasing, these costs are often included in the agreement, whereas with hire purchase, you are responsible for these costs once you own the asset.
Finally, the tax and accounting treatment of lease and hire purchase can also be different. With leasing, the asset is not shown on your balance sheet, whereas with hire purchase, the asset is shown on your balance sheet as a fixed asset.
Conclusion
In conclusion, both leasing and hire purchase can be good financing options depending on your needs and circumstances. Leasing is ideal for businesses or individuals who want to use an asset for a specific period without committing to owning it. Hire purchase, on the other hand, is a good option for those who want to acquire an asset without the need for a large upfront payment and eventually own the asset.
It is important to take into account the ownership, maintenance costs, and accounting treatment when deciding which option is best suited for your needs. By understanding the difference between lease and hire purchase, you can make an informed decision when it comes to financing your assets.
Table difference between lease and hire purchase
| Lease | Hire Purchase | |
|---|---|---|
| Ownership | The lessor retains ownership of the asset | The hirer becomes the owner of the asset after full payment |
| Duration | Short-term (usually 1-5 years) | Long-term (usually 2-5 years) |
| Payment | Monthly or quarterly rental payments | Monthly installments |
| Return of Asset | The asset is returned at the end of the lease term | The asset becomes the property of the hirer after full payment |
| Upfront Cost | Low upfront cost | Significant upfront cost |
| Tax Benefits | Tax deductions for rental payments | Tax deductions for depreciation and interest charges |