Difference Between Finance Lease and Hire Purchase

Finance Lease vs Hire Purchase

Why own a mango tree when all you are interested in is, eating mangoes? If you are getting the right to live in an apartment, what difference does it make whether you are the legal owner of the apartment or not as long as it is almost guaranteed that you can live in the apartment for as long as you live? This is the philosophy behind a finance lease, where the user of equipment, called lessee, agrees to pay a rent to the lessor (manufacturer or the owner) in return for the right to use the equipment for a period specified in the contract. This system is different from hire purchase, where the hirer or the user gets to use the equipment, but he is paying an installment for a certain time period, and becomes the owner of the product after he has made payment of the final installment. Let us take a closer look at the differences between finance lease and hire purchase.

In hire purchase, one does not get ownership rights and there is an option of buying at the end of the lease period. In case of finance lease, the equipment (or property) is never in the name of lessee though, he is assured of being able to use the equipment for a large proportion of the product’s useful life, or as long as he is alive.

In case of expensive capital equipment, it often makes sense for companies to refrain from outright purchase that is a costly proposition. Other options available to a company are of course to lease, or to have a hire purchase agreement with the owner or manufacturer of the equipment. Both finance lease, as well as hire purchase, allows spreading the cost of acquiring the asset, which is convenient for a company. The company gets to use the asset for a long period of time making regular payments, as if the asset has been taken on hire or rent.

In hire purchase, interest for the entire period plus the price of the product are added up to come up with a monthly installment that a hirer has to pay, and he becomes an owner only after final installment has been paid. Maintenance of the equipment is normally a responsibility of the hirer. On the other hand, in finance lease, ownership is never transferred to the lessee and capital allowances are claimed by the lessor who in turn can pass on some of these benefits in the form of reduced rentals to the lessee.

Although in finance leasing, a customer has no ownership, he gets to enjoy all the risks and rewards associated with ownership. He has to maintain the product and also mention it in his balance sheet as a capital item.