What is the Difference Between Finance Lease and Hire Purchase?

Finance lease and hire purchase are both financial arrangements that allow businesses to acquire assets without making a full payment upfront. However, there are key differences between the two:

1. Ownership: In a finance lease, the lessor retains legal ownership of the asset during the entire leasing period, while in hire purchase, the ownership is transferred to the hirer upon completion of all installments.
2. Depreciation Benefit: In finance leasing, the lessor derives the depreciation benefit, while in hire purchase, it is the hire purchaser who gets the depreciation benefit for income tax purposes.
3. Payment Structure: Hire purchase involves dividing the total amount of the asset into installments, which include the principal amount and interest. In contrast, in a finance lease, the lessee pays lease rentals at specified intervals, which cover the cost of using the asset.
4. Tax Treatment: In a finance lease, the lessee can write the monthly payments off against their profits, reducing the tax they have to pay. In hire purchase, the initial down payment and the monthly installments are considered capital expenditures, which can be depreciated over time.
5. Contract Length: Both finance lease and hire purchase agreements are valid for a fixed pre-agreed period of time. However, a finance lease typically covers most of the asset's economic life, while hire purchase focuses on financing the use of the asset until the agreement is terminated.

In summary, a finance lease is a "rent-to-own" arrangement where the lessee retains the risks and rewards of ownership but does not officially own the asset, while hire purchase is a "pay-to-borrow" agreement where the hirer has the option to purchase the asset upon the expiration of the contract. The choice between the two depends on the business's financial goals and the purpose of the asset.

Comparative Table: Finance Lease vs Hire Purchase

Here is a table comparing the differences between finance lease and hire purchase:

Both finance lease and hire purchase agreements allow for the use of an asset without ownership transfer. Finance lease involves making rental payments, while hire purchase involves paying a combination of the agreed amount and VAT upfront. The duration of both agreements is typically between 3 and 5 years. The main difference between the two is that in a hire purchase agreement, the option to purchase the asset at the end of the agreement is available, while in a finance lease, the asset remains with the lessor.