lease financing and hire purchase
- 3. LEASE Lease is a financial contract between the business customer (user) and the equipment supplier (normally owner) for using a particular asset/equipment over a period of time against the periodic payments called “Lease rentals”. Lease generally involves two parties i.e. the lessor (owner) and the lessee (user). Under this arrangement, the lessor transfers the right to use to the lessee in return of the lease rentals agreed upon. Lease agreement can be made flexible enough to meet the financial requirements of both the parties.
- 4. HIRE PURCHASE Hire Purchase is a kind of installment purchase where the businessman (hirer) agrees to pay the cost of the equipment in different installments over a period of time. This installment covers the principal amount and the interest cost towards the purchase of an asset for the period the asset is utilized. The hirer gets the possession of the asset as soon as the hire purchase agreement is signed. The hirer becomes the owner of the equipment after the last payment is made. The hirer has the right to terminate the agreement anytime before taking the title or the ownership of the asset.
- 5. LEASING Vs. HIRE PURCHASE FINANCING • Both lease financing and hire purchase financing are a form of secured loan. • Both involves fixed payments. • The hirer becomes the owner of the assets as soon as he pays the last instalments. In case of lease, the asset reverts back to the lessor at end of the lease period.
- 7. LEASING HIRE PURCHASE OWNERSHIP In lease, ownership lies with the lesser. The lessee has the right to use the equipment and does not have an option to purchase In hire purchase, the hirer has the option to purchase. The hirer becomes the owner of the asset/ equipment immediately after the last instalment METHOD OF FINANCING Leasing is a method of financing business assets only Hire purchase is a method of financing both business assets and consumer articles
- 8. LEASING HIRE PURCHASE DEPRECIATION In leasing, depreciation and investment allowance can be claimed as an expense by the lesser In hire purchase depreciation and investment allowance can be claimed by the hirer. TAX BENEFITS The entire lease rental is tax deductible expense Only the interest components of the hire purchase instalments are tax deductible
- 9. LEASING HIRE PURCHASE SALVAGE VALUE The lessee, not being the owner of the assets and not enjoy the salvage value of the assets The hirer, in purchase being the owner of assets and enjoy the salvage value of assets DEPOSIT The lessee is not required to make any deposits The hirer is required to deposit 20% of the cost
- 10. LEASING HIRE PURCHASE RENT- PURCHASE The lessee take the asset on a rent basis Here the asset is purchased by the hirer EXTENT OF FINANCE Lease financing is invariably 100% financing. It does not required any immediate down payment or margin money by the lessee In hire purchase, a margin equal to 20- 25% of the cost of the assets to be paid the hirer.
- 11. LEASING HIRE PURCHASE MAINTENANCE The maintenance of leased asset is responsibility of the lessee Here the cost of maintenance of hired assets is to be borne by the hirer himself REPORTING The leased assets are shown by way of footnote only The assets on hire purchase is shown in the balance sheet of the hire.
- 12. LEASING HIRE PURCHASE DURATION Lease agreements are done for longer duration and for bigger assets like land, property etc. Hire Purchase agreements are done mostly for shorter duration and cheaper assets like hiring a car, machinery etc.