What is the Difference between hire purchase and lease?

A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals). The important feature of a lease contract is separation of the ownership of the asset from its usage. Lease financing is based on the observation made by Donald B. Grant: "Why own a cow when the milk is so cheap? All you really need is milk and not the cow." Hire purchase is a type of instalment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last instalment is paid. The hire purchase system is regulated by the Hire Purchase Act 1972. This Act defines a hire purchase as "an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which: 1) The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic instalments 2) The property in the goods is to pass to such person on the payment of the last of such instalments, and 3) Such person has a right to terminate the agreement at any time before the property so passes". Hire purchase should be distinguished from instalment sale wherein property passes to the purchaser with the payment of the first instalment. But in case of HP (ownership remains with the seller until the last instalment is paid) buyer gets ownership after paying the last instalment. HP also differs form leasing. Meaning A lease transaction is a commercial arrangement, whereby an equipment owner or manufacturer conveys to the equipment user the right to use the equipment in return for a rental. while Hire purchase is a type of instalment credit under which the hire purchaser agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. In lease financing no option is provided to the lessee (user) to purchase the goods. Where by in Hire purchase option is provided to the hirer (user). Lease rentals paid by the lessee are entirely revenue expenditure of the lessee. While in case of higher purchase only interest element included in the HP instalments is revenue expenditure by nature. Components Lease rentals comprise of 2 elements (1) finance charge and (2) capital recovery. HP instalments comprise of 3 elements (1) normal trading profit (2) finance charge and (3) recovery of cost of goods/assets.

What is the Difference between hire purchase and a finance Lease Answer 1.Ownership: The lessor is the owner of the lessee is # 5 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 hirepurchased. 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. Leasing and Hire-purchase From legal rights and obligations viewpoint, there is no difference between lease and hirepurchase transactions. Both are viewed as bailment transactions.Accordingly, most of the common law applicable to hire-purchase transactions is also applicable to leases, and vice versa. The difference between the two is principally the non-existence of option to buy in case of lease transactions. In other words, lease transactions carrying an option to buy, explicitly or implicitly, will be treated as hire-purchase transactions. This may lead to differences in taxation treatment, but there is no appreciable difference in legal rights of parties. Click here for more on the substance of a financial lease and hire-purchase.Hire-purchase is treated as distinct from conditional sale, since it provides the hirer with an option to buy, and does not impose an obligation to buy. The usual option to buy in case of hire-purchase transactions is for a nominal price of Re.1. If hire-purchase transaction were to force the hirer to continue paying the hire installments through the term of hire, and offer an option to the hirer only for the nominal purchase price of Re. 1, the optionality will be meaningless, and such hire-purchase transaction may be treated as a conditional sale. Refer for case law on this point to Lease Financing and Hire-purchase, page 665. See the next heading for more on this.