Have you ever considered purchasing a car or equipment for your business, but can’t decide whether to opt for hire-purchasing or leasing? Both options have their own advantages and disadvantages that can make choosing between them quite daunting.
Hire purchasing is a type of installment purchase where the buyer pays for the goods in installments and becomes the owner after the final payment. While leasing is a contractual agreement in which the lessee pays the lessor for the right to use an asset for a specified period of time
Hire Purchasing vs. Leasing
|In hire purchasing, the buyer becomes the owner of the asset once the final payment is made.||In leasing, the leasing company retains ownership of the asset throughout the lease term.|
|The buyer bears the risk of loss or damage to the asset.||The leasing company bears the risk of loss or damage to the asset.|
|In hire purchasing, the buyer makes regular installment payments and eventually owns the asset.||In leasing, the lessee pays for the use of the asset without owning it.|
|Here the buyer bears the depreciation costs.||Here the lessor bears the depreciation costs.|
|In hire purchasing, the buyer is responsible for maintenance and repairs.||In leasing, the lessor may be responsible for maintenance and repairs.|
|Here the buyer can sell or modify the asset during the hire-purchase period.||Here the lessee may be able to upgrade or change the leased asset.|
|In hire purchasing, the buyer may be required to make a down payment or pay other fees.||In leasing, the lessee may be required to make a security deposit or pay other fees.|
Introduction to hire purchasing and leasing
With HP, you take out a loan to buy an asset (usually equipment or vehicles), and then pay it off over an agreed period of time, usually with interest. Once the asset is paid off, it belongs to you.
Leasing is similar to renting – you make regular payments over a set period of time to use an asset, but you don’t own it at the end of the lease. Leasing can be a good option if you need to use an asset for a short period of time or don’t have the upfront capital to buy it outright.
Similarities between hire purchasing and leasing
- Both options provide a way to finance the purchase of a car without paying the full price upfront. With either option, you will make monthly payments over a set period of time until the car is paid off.
- Both hire purchase and leasing agreements usually include an option to purchase the car at the end of the agreement. This means that you have the flexibility to own the car outright if you choose, or return it and walk away with no further obligations.
- Both options usually require some form of security deposit or down payment. The size of this payment will vary depending on the lender, but it is typically a small percentage of the total cost of the car.
Advantage and disadvantage of hire purchasing
The main advantage of hire purchasing is that you have full ownership of the car from the start, so you can do what you like with it You can also usually get a better interest rate with hire purchasing than with other types of finance, such as personal loans.
The downside of hire purchasing is that you may have to pay a large deposit upfront, and your monthly payments will usually be higher than with leasing. There’s also a risk that if you miss a payment or default on the agreement, you could lose your car.
Advantage and disadvantage of leasing
On the plus side, leasing can provide a business with much-needed equipment or machinery without requiring a large upfront investment. This can free up cash flow and allow a business to preserve working capital.
Additionally, leased equipment is often tax-deductible, which can save a business money come tax time.
Leasing also has its downsides, however. For one, leases typically have higher monthly payments than if the equipment was purchased outright.
Additionally, at the end of a lease term, businesses will need to either purchase the equipment for its fair market value or return it to the leasing company.
Factors to consider when choosing between the two
1. The total cost of the purchase/lease.
2. The length of time you need the asset for.
3. The amount of use you will get out of the asset.
4. The level of maintenance and upkeep required.
5. Your financial situation and ability to make regular payments.
Key differences between hire purchasing and leasing
- With hire purchasing, the asset is owned by the business once the final payment is made. With leasing, the asset remains owned by the leasing company.
- Hire purchase agreements typically have shorter terms than leases, so the business will own the asset sooner. This also means that monthly payments are usually higher with hire purchases.
- Leasing often requires a down payment, while hire purchasing does not.
- Difference between cheques and bills of exchange
- Difference between manual and computerized accounting
- Difference between marginal and absorption costing
Both hire purchasing and leasing are financial arrangements that allow businesses and individuals to acquire assets without paying the full purchase price upfront. While hire purchasing offers eventual ownership of the asset to the buyer, leasing offers the flexibility to use an asset without ownership responsibilities. The choice between hire purchasing and leasing depends on various factors such as the buyer’s financial position, the nature of the asset, and the buyer’s long-term goals.