Summary: Confuse with Hire Purchasing and Leasing? We here at EI, got your back! Read this article to figure out the difference between Hire Purchasing and Leasing.
Image: E Finance Management
When you start a business, you would need to pay for certain assets such as land and machinery.
But do you know if you want to use an asset, there are a few options to finance the asset rather than forking out a large sum of money and purchase it on the spot.
Lease and hire purchase are those options to finance your assets.
Both lease and hire purchase can help you to spread the payments for an asset into installments instead of paying for it at the point of acquisition. This helps you to manage your cash flow and liquidity needs.
However, there are some obvious difference between lease and hire purchase you should take note before signing that agreement.
A hire purchase is a method of buying goods through making installment payments over time.
The hire purchaser gets the possession of the asset as soon as the hire purchase agreement is signed.
The hire purchaser becomes the owner of the equipment after the last payment is made. He or she must pay all the installments before the asset transferred to him or her. If the hire purchaser is unable to pay the remaining installments, then the vendor can repossess the asset without paying any compensation to the hire purchaser.
The hirer purchaser pays a down payment in the beginning and the rest of the price in installments.
This installment covers the principal cost of the purchased equipment or machinery along with the interest cost where the period the asset is utilized.
Depreciation will be claimed by the hirer purchaser as by the end of the day, he or she will own the asset.
Hire purchase usually covers assets such as machinery and equipments for instance car, trucks etc.
A lease is an between two parties in which the lessor (property owner) lets the lessee (renter) uses his or her asset over a period of time with monthly rental payments
A lease is best and ideal for those who have no plans of owning the asset and temporarily make use of the assets.
In leasing, there’s no concern with regard to ownership since you are just renting and using the asset. You, the lessee, gets the permission from the lessor) to use his or her asset. At the end of a lease, you’ll end up having nothing as you just paid for the asset for the duration of your usage.
While the lessee has the right to use the equipment, he or she does not have the option to purchase.
So the installments cover the cost of using the asset. Think of it as a rent.
The depreciation of the asset will not affect the lesse as he or she will end up returning the asset to the lessor once the agreement is over. On the other hand, depreciation is claimed by the lessor.
There are leases that cover equipment and machinery usage. But lease tends to be more popular for renting out land, building and property.