When a person or a business wants to use an expensive asset but does not want to pay the full price upfront, two common options appear – finance lease and hire purchase. At first look, both seem similar because in both cases the asset is paid for in instalments. But in reality, they are quite different in ownership, risk, accounting treatment, and legal position.
To understand this clearly, think of one option as using an asset like an owner, and the other as buying an asset slowly over time.
What is a Finance Lease?
A finance lease is an agreement where the lessee (user) gets the right to use an asset for a long period, while the ownership usually remains with the lessor.
In simple words, a finance lease is long-term renting that feels like ownership, but legally is not ownership.
Key features of a finance lease
- Ownership remains with the lessor
- Lessee uses the asset for most of its useful life
- Lease payments are fixed and compulsory
- Lessee bears maintenance, repair, and insurance costs
- Lease is usually non-cancellable
- At the end, asset may or may not be transferred
Example: A company takes heavy machinery on lease for 7 years. The company uses it fully, maintains it, and pays regular lease rentals, but the machine legally belongs to the leasing company.
What is Hire Purchase?
Hire purchase is an agreement where the buyer takes possession of the asset immediately but ownership transfers only after the last instalment is paid.
In simple words, hire purchase is buy now, pay later, become owner at the end.
Key features of hire purchase
- Ownership transfers after full payment
- Instalments include principal + interest
- Buyer can use the asset immediately
- Buyer bears maintenance and insurance
- Agreement can be terminated by returning the asset
- Seller can repossess asset on default
Example: A person buys a car on hire purchase. He uses the car from day one, but the car becomes legally his only after he pays the final instalment.
Key Differences Between Finance Lease and Hire Purchase
Let’s compare them clearly, point by point.
1. Ownership of asset
- In a finance lease, ownership usually remains with the lessor.
- In hire purchase, ownership passes to the buyer after the last instalment.
This is the biggest difference.
2. Nature of agreement
- A finance lease is primarily a lease agreement.
- A hire purchase is a sale agreement in instalments.
3. Transfer of ownership
- In a finance lease, transfer of ownership is not automatic.
- In hire purchase, transfer of ownership is compulsory after full payment.
4. Right to terminate
- A finance lease is generally non-cancellable.
- Hire purchase can be terminated by the hirer by returning the asset.
5. Depreciation benefit
- In a finance lease, depreciation benefit usually goes to the lessor (unless accounting rules state otherwise).
- In hire purchase, depreciation benefit goes to the buyer after ownership transfers.
6. Maintenance responsibility
In both cases, maintenance is usually borne by the user.
However, legally:
- Finance lease → lessee bears risk without ownership
- Hire purchase → buyer bears risk as future owner
7. Accounting treatment
In a finance lease:
- Asset and liability are shown in the lessee’s books
- Lease rent is split into interest and principal
In hire purchase:
- Asset is shown in buyer’s books
- Outstanding amount is shown as liability
8. Risk of asset
- In a finance lease, risk lies with the lessee, even without ownership.
- In hire purchase, risk lies with the buyer, who will become owner.
9. Suitability
Finance lease is suitable when:
- Asset is needed for long-term use
- Ownership is not essential
- Business wants flexibility in capital use
Hire purchase is suitable when:
- Ownership is desired
- Asset is needed permanently
- Buyer wants to spread cost over time
Quick comparison in one look
| Basis | Finance Lease | Hire Purchase |
| Ownership | Usually with lessor | Transfers after last instalment |
| Nature | Lease | Sale on instalments |
| Cancellation | Not allowed | Allowed |
| Depreciation | Lessor | Buyer |
| Risk | Lessee | Buyer |
| Best for | Business use | Personal or business ownership |
Easy way to remember
- Finance Lease → Use like owner, but not owner
- Hire Purchase → Use now, own later
Final understanding
The real difference between finance lease and hire purchase lies in ownership intention.
If the goal is long-term use without owning, finance lease makes sense and if the goal is eventual ownership with easy payments, hire purchase is better.
Once you understand this single idea, the rest of the differences become easy to remember and explain—whether for exams, business decisions, or daily-life understanding.
