Financing Leasing versus Hire Purchase

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Mohammad Hamdan
Russian Federation

Financing Leasing versus Hire Purchase

🔥NEW At first glance, financial leasing and hire purchase contracts give you (as a manager in a company, businessman or industrial) the impression that they are very similar or even the same; that they are two different names for one contract and have the same effects and the same results. Perhaps this seems so because in both methods "rent" is existent as a main component of the relationship between the parties.
However, on a legal and even practical level, that is incorrect. Because the contractual intention in both contracts is completely different, as the intention of the owner in the HIRE PURCHASE contract is directed towards selling the asset; this sale will be completed when the hirer pays the last rent payment in the contract. Whereas the owner's intention in the FINANCIAL LEASING contract is directed towards financing the lessee, who also has "the right of choice" to purchase the asset if she/he expresses her/his desire to do so at a specific price, which takes into account the period of use and the paid lease allowances. Therefore, the intentions, obligations and effects of both contracts differ from the other.
Below I will give an overview of all most important differences between FINANCIAL LEASING and HIRE PURCHASE:
  1. THE EXTENT OF FINANCE
    • FINANCIAL LEASING is considered fully funded financing, whereby the lessee is not obligated to pay any advance payment of the asset's price.
    • As for HIRE PURCHASE, an amount of margin money is required to be paid by the hirer, so it is considered partial financing, which is similar to a loan.
  2. OWNERSHIP TRANSFER
    • In FINANCIAL LEASING, the ownership of the asset does not get transferred from the lessor to the lessee, unless the lessor activates her/his right of choice to purchase the asset at the end of the contract. Consequently, the lessee is considered as the owner of the asset only at the moment when she/he issues a voluntary expression indicating her/his desire to own the asset at the end of the contract without retroactive effect.
    • Whereas, in HIRE PURCHASE, ownership is transferred from the owner to the hirer upon payment of the full price of the asset (pay the latest rent). This ownership is considered to have happened from the date of signing the contract, i.e., the hirer is retrospectively considered as the owner of the asset. This happens automatically when the last payment is paid, without adding any additional amounts.
  3. THE NATURE OF PERIODIC PAYMENTS
    • The periodic payments in FINANCIAL LEASING are considered rental allowances (fees), and the asset's purchase price at the end of the contract is considered independent of the lease rents paid to the financing company (owner), although it is ususally calculated based on them and the asset's depreciation.
    • While the periodic payments in HIRE PURCHASE are an integral part of the asset price. They are calculated based on the asset's price at the time of purchase (signing the contract), and the profits the owner wants to achieve are added to it.
  4. PAYMENT DEFAULTS
    • The main claim of the owner in FINANCIAL LEASING (in case the lessee stops or delays paying) is to recover the asset, in addition to claiming for subsequent lease payments.
    • In HIRE PURCHASE, the owner requires the hirer to pay all amounts owed her/him first. Then if the hirer cannot pay, she/he will claim to recover the asset. But if the hirer pays, the owner cannot return the asset back.
  5. CREDITORS' RIGHTS
    • The lessee's creditors cannot place a legal attachment on the asset for the benefit of their debts' in FINANCIAL LEASING, unless she/he activates her/his right of choice to buy it. The asset is considered part of the financial liability of the lessor.
    • The creditors of the hirer have the right in HIRE PURCHASE to place a legal attachment on the asset in favour of their debts. The asset is considered part of the financial liability of the hirer if the creditors have "good faith".
  6. TAX IMPACT
    • In FINANCIAL LEASING, the lessor derives the depreciation benefit of the asset, as the total lease fees are shown as expenditure by the lessee.
    • In HIRE PURCHASE, the hirer claims the depreciation of asset as an expense, so she/he gets the depreciation benefit for income tax.
⇨ Any remarks? Did I miss anything?

References:
Guojin Liu, (2010), "Finance Leasing In International Trade", The University of Birmingham, Thesis, p. 266.
Tanja Kangas, (2009), "Privity of Contract in Financial Leasing", Helsinki Law Review, pp. 69-100.
Sanjay (2019), "Difference between Lease Financing vs. Hire Purchase", e-Finance Management.

  Gandhi Heryanto
Management Consultant, Indonesia
 

Hire Purchase versus Bank Loan

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