Differences between Lease and Hire Purchase
Lease and Hire Purchase are two widely used methods of acquiring assets, particularly in business. Although both options involve using an asset for payment, there are several crucial differences between them.
This blog aims to provide an overview of the distinctions between Lease and Hire Purchase in terms of ownership, method of financing, depreciation, tax benefits, salvage value, and deposit.
Hire Purchase vs Lease Agreement Comparison
Following are some of the key differences between both terms:
Ownership: One of the fundamental differences between a Lease and a Hire Purchase lies in ownership. In a lease agreement, the ownership of the asset remains with the lessor (the owner), whereas in a hire purchase agreement, the ownership is transferred to the hirer (the buyer) after the payment of all instalments.
Payment Structure: In a lease, regular rental payments are made by the lessee (the renter) to use the asset for a fixed period. On the other hand, in a hire purchase, the buyer pays regular instalments over a fixed term until full ownership is attained.
Duration: Lease agreements typically have shorter terms compared to hire purchase agreements. Leases can range from months to a few years, while hire purchase terms can extend up to several years.
Flexibility: Lease agreements offer more flexibility as they allow for periodic upgrades or changes of assets at the end of each lease term. Hire purchase agreements are generally more rigid, with limited options to modify or exchange assets during the contract period.
Maintenance and Repairs: With a lease agreement, maintenance and repair responsibilities often lie with the lessor. However, in hire purchase agreements, these responsibilities usually fall on the hirer once they assume ownership.
Residual Value: Leases often include provisions for determining resale value at the end of the term (residual value). The lessee may be required to make an additional payment if there is higher depreciation than expected. This feature is not present in hire purchase agreements.
Tax Considerations: In lease agreements, the lessor, not the lessee, claims depreciation on the asset throughout the lease period. This can be advantageous for businesses with limited taxable income, as it reduces their tax liability. Also, lease payments typically include GST/VAT, which can be claimed as input tax credit by the lessee.
On the other hand, once ownership transfers to the buyer at the end of the agreement, they can claim depreciation on the asset. This can be beneficial for businesses looking to spread the cost of an asset over its useful life. The interest portion of the hire purchase payments is deductible as a business expense.
Termination: Terminating a lease agreement before its completion can involve penalties or additional fees, as it is a contract for a fixed period. Terminating a hire purchase agreement may also come with financial penalties, but the buyer has the option to sell the asset and settle the outstanding balance.
Summary
Lease and Hire Purchase are distinct methods of asset acquisition, catering to different financial needs and ownership preferences. Understanding the differences discussed above can help individuals and businesses choose the appropriate option depending on their specific circumstances.
Both lease and hire purchase have their own advantages and disadvantages, depending on individual circumstances. When deciding between these options, it’s important to consider factors such as cash flow requirements, asset utilization, and long-term goals.
