In U.K a hire purchase contract provides an opportunity to the hirer to obtain legal ownership of the asset. Although there are certain terms and conditions like making of agreed upon payments that the hirer must make in order to acquire the legal rights to the title of the asset.
In U.K a lease finance contract has no option for the lessee to acquire the legal right to leased asset.
The hire purchase contract provides the right to purchase the asset and lease contract provides the right to use.
TYPES OF LEASES
Hire purchase, finance lease and contract hire the three basic types of leasing available in U.K.
Hire purchase or lease purchase is commonly availed in purchasing a car, fridge or furniture. The hirer is given the opportunity to own the asset after fulfilling the terms of the agreement satisfactorily. The hirer must pay off the complete amount over the agreed upon period.
The agreement to own the asset can be terminated if the hirer violates the terms of the agreement. Hire purchase allows the offset of the interest paid against profits. Hire purchase can be useful if the asset will maintain its value, otherwise most businesses shun the notion of owning the leased equipment.
Hire purchase has built-in flexibility.
In finance lease the ownership of the equipment remains with the finance company. This is the difference between finance lease and hire purchase. Though finance lease is akin to hire purchase, the asset is returned to the company at the end of the contract. The contract clearly mentions that you have to pay off the total value of the item and the interest as per agreement.
An option of secondary agreement can be put into effect at the end of the original agreement, in case of extended use of asset. You need to pay a small fee to get the secondary agreement which the finance company is happy to do so.
A right to sell off the asset by you is included in most finance lease agreements. The choice of selling the asset permits to get rebate on the left over rental charges.
A contract hire has the added value of a maintenance contract along with the usage of equipment. The item remains the property of the finance company and you pay the rental fee for the using the equipment for the pre-determined period. The equipment is returned less the residual value to the finance company on the expiry of the agreement.
The words residual value prompts the addition of maintenance tag because at the end of the contract you pay the set amount plus interest and minus the residual value. Contract hire draws its attraction against lease finance, for, it is cheaper and only rental fees appears on the balance sheet. The third major attraction is that you do not have a huge capital outlay for the item to make the balance sheet look ugly.
Take your pick among purchase hire, lease finance and contract hire that best curtails to your needs.