MS 46 IGNOU MBA Solved Assignment - Explain the concepts of leasing and hire purchase and point out the difference between the two.

Explain the concepts of leasing and hire purchase and point out the difference between the two.

Ans :

Hire Purchase

                Hire Purchase, also known as Lease Purchase,  is ideal for Business or Private Users who wish to purchase a vehicle, but would like to spread the cost with manageable monthly installments. With Hire Purchase, there is normally a minimum deposit to pay, and then you can either spread the remaining cost equally over the chosen term, or opt to have a lump sum final payment, often referred to as a "Balloon". This type of agreement is designed for people requiring ownership, and there is no option of returning the vehicle at the end of the term.  Additional features such as maintenance may be available on a standalone basis, but not as part of this agreement.

How Does It Work?

          The process for buying a vehicle on Hire Purchase is simple.  First decide on the make/model of vehicle(s) required.  Then decide on the term of agreement (usually 2 to 5 years).  We'll then provide a quotation allowing you to spread the total cost, either with or without a final lump sum payment.

 Leasing

         A lease may be defined as a contractual arrangement or transaction in which a party (lessor) owing an asset or equipment provides the asset for use to another or transfer the right to use the equipment to the user (lessee) over a certain or for an indefinite period of time for consideration in the form of periodic payments (rentals). At the end of the period of contract (lease period), the asset or equipment reverts back to the lessor unless there is a provision for the renewal of the contract. The above definition reveals that leasing essentially involves the divorce of ownership from the economic use of an asset or equipment. It is a device of financing the cost of an asset. Lease financing is thus a device of financing or money lending. Lease financing is available for land, buildings, industrial equipments etc.

                As we have already discussed that in leasing, the user company does not own the machinery or the equipment leased; yet for all practical purposes the user has virtually all rights over the machinery. The main difference between leasing and term loan are: a finance company called the leasing company arranges to buy a piece of machinery or equipment (usually in consultation with and prior approval of the lessee) and the leases the machinery on long term to the lessee.
The basic features of a lease are-

• There are essentially two parties associated in the leasing; the lessor (owner of the asset) and the lessee (user of the asset).However, in some cases a third party called lender or financer is involved when the lessor thinks it to be necessary.

• The asset- a vehicle, an aircraft, a machine, a computer, a building, etc can be a subject of leasing.

• The lease contract separates the ownership from the user of the asset. After the tenure is over the asset reverted to the owner.

• Lease contract is done for a specified period; may be for long-term(called finance lease) or for short-term(called operating lease)

• Lessee has to pay a consideration to the lessor for using the asset. This is called rentals.

Point of Difference	Leasing	Hire-Purchase
Ownership Tax Deductibility Depreciation and other allowances Salvage Value	Ownership is not transferred to the lessee Entire lease rentals are tax-deductible expenses Cannot be claimed by the lessee Lessee cannot realize salvage value of the asset on the expiry of the lease  life of the asset.	Ownership is transferred to the hirer on payment of last installment. Only the interest component and not the entire installment is deductible Can be claimed by the hirer. Hirer can realize salvage value of the asset after payment of last installment and expiry of the life of the asset.

The lessee pays the lease rental whereas in a term loan the borrower is expected to pay the interest as well as the repayment of the loan amount. The lessee does not own the equipment and hence cannot claim the depreciation and investment allowances on the relative machines. However, the lease rental would normally include repayments towards principal and interest and the entire rental may be written off as eligible expenditure from profits for income tax purpose.

At the end of the lease period, the contract may be renewed or the asset may be sold to the lessee or the asset may be reverted to the owner

DIFFERENCES  BETWEEN LEASING AND HIRE-PURCHASE

Many a times people confuses between the leasing and hire purchase contract. Both leasing and hire-purchase provide a source of financing of fixed assets. However, the two are not similar on many accounts. Let us discuss the following points of distinction between leasing and hire purchase