Leasing and Hire Purchase are two common methods of financing the use of an asset, like a car or machinery, without buying it outright with a one-time payment. While they seem similar, they are fundamentally different in terms of ownership and accounting.
Leasing
A Lease is a contract where one party (the lessor) who owns an asset allows another party (the lessee) to use that asset for a specific period in exchange for periodic payments (lease rentals).
- Simple Analogy: Leasing is like renting a house. You get to use the house by paying a monthly rent, but the landlord remains the legal owner. At the end of the rental agreement, you have to vacate the house.
Hire Purchase
A Hire Purchase is an agreement where a person (the hirer) agrees to hire an asset for a period by paying instalments, and at the end of the period, they have the option to buy the asset after paying all the instalments.
- Simple Analogy: Hire purchase is like a rent-to-own agreement for a piece of furniture. You pay monthly instalments which are part rent and part principal. After the final instalment, the furniture becomes yours.
Key Differences: Leasing vs. Hire Purchase
| Feature | Leasing | Payments are called instalments, which include both an interest component and a principal component. |
| Ownership | The Lessor (owner) retains ownership throughout the lease period. | Ownership is transferred to the Hirer (user) after the last installment is paid. |
| Depreciation | The Lessor claims depreciation as they are the owner. | The Hirer can claim depreciation from the beginning as they intend to buy the asset. |
| Payments | Payments are called lease rentals, which are an expense for the lessee. | Payments are called installments, which include both an interest component and a principal component. |
| Option to Buy | There is generally no option to buy the asset at the end of the term. | There is a built-in option to purchase the asset at the end. |
| Purpose | Primarily for using an asset without owning it. | Primarily for acquiring an asset by paying for it over time. |
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