Leasing & Hire Purchase

By: Rohan Gulrajani

Divij Kathuria
Shashwat Sharma
Hardik Karnavat
Sarvesh Agarwal
What is Leasing?
●  Lease is a financial arrangement, wherein one party (lessor) allows
another party (lessee) to use the capital asset or equipment for a definite
period, in return for an adequate consideration, i.e. lease rental charges.
Parties to Lease

• Lessor: Real owner of the asset, who can be an individual or firm. The
lessor grants the right to use the asset, for a fixed consideration over
the period of lease.
• Lessee: The one who legally acquires the right to use the asset or
equipment on the payment of recurring rentals which are to be paid
over the term of the lease.
CONCEPT OF LEASING
● Lease finance denotes procurement of assets through lease. The subject
of leasing falls in the category of finance.

• Leasing has grown as a big industry in the USA and UK and spread to other
countries during the present century.

• In India, the concept was pioneered in 1973 when first leasing company
was set up in Madras and the eighties have seen a rapid growth of business
Major Features of Lease

1.The Contract
2.Assets
3.Lease Period
4.Rental Payments
5.Maintain
6.Term of Lease
7.Ownership
8.Terminating
9.Renew or Purchase
10.Default
Advantages of Lease Financing

1.Saving of Capital: 
2.Flexibility and Convenience: 
3.Planning Cash Flows: 
4.Improvement in Liquidity: 
5.Shifting of Risk of Obsolescence: 
6.Maintenance And Specialized Services: 
7.Off-the-Balance-Sheet-Financing: 
Leased Asset

● The subject of the lease is the asset, article or property to be leased. The asset may
be anything – an automobile, land, factory, or consumer durable. Only tangible
assets can be leased, you cannot lease intangible assets, since one of the prime
elements of a lease is handing over possession, along with the right to use. Hence,
intangible assets are assigned, whereas tangible assets may be leased.
Lease Period

● The term of lease, or lease period, is the period for which the agreement of the
lease shall be in operation. As an essential element in a lease is redelivery of the
asset by the lessee at the end of the lease period, it is necessary to have a period of
lease. During this certain period, the lessee may be given a right of cancellation,
and beyond this period, the lessee may be given a right of renewal, but essentially,
a lease should not amount to a sale, i.e. the asset should not be given permanently
to the lessee.
 Types of Lease

Based on Nature
• Financial Lease
• Operational Lease
Financial Lease

●  In a Financial Lease, though the device used is leasing, the purpose and effect is
virtually financing – leasing for the purpose of financing. However the generic
differences between a lease and a lease mentioned earlier still remain. The lessor
will provide the money needed by the lessee to buy an asset; in return the
payments by the lessee will be in the form of lease rentals. The lease amount is the
amount that has been financed. A Financial Lease is a ‘lease look-alike’. This
lease should be treated like a lease with the lease amount as the principal and a
interest charged.
Operational Lease

● It is a non-financial lease. Any other lease other than a financial lease is an

operating lease. In a financial lease, the lessor does not operate the asset he leases;
he merely finances it. The word ‘operating lease’ is not applied to indicate that the
lessor ‘operating’ the asset, but only as a contra-distinction to Financial Leases.
Therefore, any lease where the lessor takes a risk other than a plain financial risk
is an operating lease. This lease should be treated like a lease with no principal
and the entire lease amount as a special interest that is paid in installments.
Types of Lease(Contd)
● Based on the Method of Lease
1.Direct lease.
2.Sale & Leaseback.
3.Leverage lease.
Direct Lease:
● Under direct leasing, a firm acquires the right to use an asset from the
manufacture directly. The ownership of the asset leased out remains with
the manufacture itself.
Sale & Leaseback:
● Under the sale & leaseback arrangement, the firm sells an asset that it
owns and then leases to the same asset back from the buyer. This way,
the lessee gets the assets for use, and at the same time, it gets cash.
Leveraged Lease:
● Leveraged lease is the same as the direct lease, except that a third party,
the lender, is involved in addition to the lessee & lessor. The lender partly
finances the purchase of the asset to be leased; the lessor turns to be a
borrower.
 Distinguish between the Operating and Financial Lease
Topics Operating Lease Financial Lease

Operating lease is short term lease used A financial lease is the lease used in connection
Definition to finance assets & is not fully amortized with long term assets & amortizes the entire cost
over the life of the asset. of the asset over the life of the lease.

Duration Short term leasing Long term leasing

Cost The lessor pays the maintenance cost. Lessee pays the maintenance cost.

Cancel & Cancelable lease & It is a changeable Non-cancelable lease & It is not a changeable
Changeable lease contract. lease contract.

Risk lessor bears the risk of the asset. The lessee bears the risk of the asset.

At the end of the contract, the asset is

Purchase At the end of the asset is not purchasable.
purchasable.

Renew It is a renewable contract. It is not a renewable contract.

Service lease, short term lease, A capital lease, long term lease, non-cancelable
Also called
cancelable lease. lease.
● Hire purchase (abbreviated HP) is the legal term for a contract, in this
persons usually agree to pay for goods in parts or a percentage at a time.
● It was developed in the United Kingdom and can now be found in China,
Japan, Malaysia, India, Australia, Jamaica and New Zealand.
● It is also called closed-end leasing.
● In cases where a buyer cannot afford to pay the asked price for an item of
property as a lump sum but can afford to pay a percentage as a deposit, a
hire-purchase contract allows the buyer to hire the goods for a monthly
rent.
● Hire-puchase system is a special system of purchase and sale of goods. Under
this system purchaser pays the price of the goods in instalments. The
instalments may be annual, six monthly, quarterly, monthly fortnightly etc.
● Under this system the goods are delivered to the purchaser at the time of
agreement before the payment of instalments but the title on the goods is
transferred after the payment of all instalments as per the hire-purchase
agreement.
● The special feature of a hire-purchase transaction is that the payment of every
instalment is treated as the payment of hire charges by the purchaser to the hire
vendor till the payment of the last instalment.. After the payment of the last
instalment, the amount of various instalments paid is appropriated towards the
payment of the price of the goods sold and the ownership or the goods is
transferred to the purchaser.
● the goods will be delivered to the purchaser at the time of agreement.
● the purchaser has a right to use the goods delivered.
● the price of the goods will be paid in instalments.
● every instalment will be treated to be the hire charges of the goods which
is being used by the purchaser.
● if all instalments are paid as per the terms of agreement , the title of the
goods is transferred by vendor to the purchaser.
● if there is a default in the payment of any of the instalments, the vendor
will take away the goods from the possession of the purchaser without
refunding him any amount received earlier in the form of various
instalments.
HIRE PURCHASE OFFERS TWO OPTIONS:

1. Hire Purchase Fixed Rate

2. Hire Purchase with Balloon
Hire Purchase Fixed Rate

● This allows you to purchase a bus or coach with regular payments that
remain constant throughout the contract term. Hire purchase fixed rate is
ideal if you need to stick to an exact budget when interest rates vary - you'll
always know how much you need to pay. Your payments can be timed to
fit with the cash flow of your business, and after the final installment,
provided you meet the terms and conditions of your agreement, you
become the owner
Hire Purchase with Balloon

● This is a safe, low-risk option as you make lower monthly payments on a

bus or coach plus a final balloon payment. Hire purchase with balloon is
flexible too. At the end of the agreement, provided you've met the terms
and conditions of your agreement, you can either make a final lump sum
(balloon) payment and keep the bus or coach or re-finance the balloon and
continue making your payments.
 Advantages of Hire Purchase

● Lower interest than other funding options.

● It is possible to claim capital allowances against tax
● Access high-spec Assets
● Kind to your cash flow.
● Own the asset after the last installment
● The interest rate on hire purchases is fixed for the duration of the
agreement. This is regardless of any changes the Bank of England make
to the base rate
● Immediate use of assets without paying the entire amount
Disadvantages of hire purchase

•Committing to ongoing fixed payments

•Higher cost overall
•Asset depreciation
•Items can be repossessed if payments are not made.
•You won’t own the asset until you have made the final hire purchase payment.
Therefore the vendor has the right to seize it should you fall foul of their terms.
•Because you won’t own the asset, it won’t be protected if you’re made bankrupt.
This is because it is technically still owned by the vendor during the agreement.
•If the business changes its strategy, resulting in the leased asset no longer being
useful, there can be early termination charges or restrictions on subleasing
Hire purchase has several advantages over a business
loan:

● Hire purchase is cheaper than a (‘unsecured’) business loan because the

ownership of the car is retained by the finance company (ie; it is secured)
and if monthly payments are not made, the vehicle is repossessed
● Hire purchase is relatively quick as it is offered directly by most dealers
and manufacturers and is agreed to more easily than a business loan to
a company without an existing relationship with its bankers
● Deposits are lower than with business loans
Hire Purchase Agreement
● A clear description of the goods
● The cash price for the goods
● The HP price, i.e., the total sum that must be paid to hire and then
purchase the goods
● The deposit
● The monthly installments
● A reasonably comprehensive statement of the parties' rights
● The right of the hirer to terminate the contract when he feels like doing
so with a valid reason.
LIST OF HIRE PURCHASE TOP
COMPANIES IN INDIA
● Hire Purchase And Lease Association
● Kothari Safe Deposits Limited
● Nicco Uco Financial Services Ltd
● Leasing Finance India Ltd.
● I.T.C. Limited
● Athreya Consultancy Services
● Softpal Consultants
● Ottapalam Co-operative Urban Bank Ltd.
BASIS FOR COMPARISON LEASING HIRE PURCHASING

Meaning Leasing is an agreement where The deal in which one party can
one party buys the asset and use the asset of the other party
allows the other party to use it for the payment of equal
by paying consideration over a monthly installments is known as
specified period is known as Hire Purchasing.
Leasing.

Down Payment Not Required Required

Installments Cost of using the asset Principal plus interest

Asset type Land and Building, Property. Car, trucks, lorries etc.

Ownership Ownership of the asset is Transfer of ownership depends

transferred to the hire purchaser on the type of lease.
on the payment of the last
installment.