Hire purchase or lease?
Hire purchase (HP) and leasing are types of asset finance which allow the business or individual to have an asset over an agreed term without buying it outright upfront.
Both forms of finance involve paying the funder a set fee monthly for the asset and an initial deposit or monthly fee is usually required upfront.
What is a lease?
Essentially a lease is a financial contract made between a business and a customer granting the customer the right to use an asset or piece of equipment for a set period of time. In return, the customer makes a number of regular payments to the lease company. There are different kinds of lease available e.g. operating lease or finance lease.
What is hire purchase (HP)?
Hire purchase offers a way not just to borrow against an asset but to eventually buy it. As with leasing, the customer makes regular payments but in this case, they own the asset once the last payment is made.
The differences between HP and a lease
The primary difference is that with a lease you will never own the asset but, with HP you will be given the option to buy it at the end of the term.
When you lease an asset you don’t need to worry about depreciation as you will never own it outright. With a hire purchase transaction it is possible that, by the time the item is owned it could be worth less than the sum borrowed.
With a lease, maintenance may be included as part of the monthly cost – dependent on the finance product and the asset involved.
The accounting and tax treatment will vary depending on the financed product, this should be evaluated when deciding on the best kind of asset finance. The handling of depreciation and capital allowance will vary depending on the product chosen.