What is the difference between hire purchase and a lease?

How lenders use it

Both products are secured on the asset. The lender owns it until an HP agreement is paid off, and owns it for the whole term of a lease. If the customer stops paying, the lender can take the asset back, subject to the contract and the law.

That is why the lender looks hard at the asset. It checks what the asset costs, how long it lasts, how well it resells and how its value falls over the term. For a lease, it also sets the residual value, because the asset comes back to it.

The credit team also checks the customer. It reviews accounts, bank statements and existing debts, and runs the debt service coverage ratio with the new payment included. It asks for the supplier's invoice or quote and checks that the asset exists and is insured.

Rules differ by customer type. Regulated credit rules can apply to sole traders and small partnerships on smaller deals, but not to most limited companies. Lenders confirm the customer type before they choose the paperwork.

Worked example

Example only, not a quote. A business wants a £30,000 van for four years. With HP, it pays a £3,000 deposit, then 48 payments of £650 and a £100 fee to take ownership. The total is £34,300, and the business owns the van.

With a lease, it pays 48 rentals of £600, which is £28,800. It never owns the van. At the end it returns it or agrees a new term. The lease costs less in cash, but the HP buyer ends up with an asset.

Common confusions

Tax and accounting treatment differ. With HP, the customer usually claims capital allowances because it is the owner, and VAT is charged up front. With a lease, VAT is charged on each rental. These rules change, so customers take advice from an accountant.

Lease is a broad word. A finance lease covers most of the asset's cost over its life. An operating lease is shorter, and the lender takes more of the risk that the asset loses value.

In the US, a lease with a $1 buyout works like HP. A fair market value lease works like a UK lease. Check the end-of-term option, not the label.

Questions lenders ask

Who owns the asset under hire purchase?

The lender owns it until the customer makes the final payment and any option fee. Then ownership passes to the customer. Until then the customer has the right to use the asset.

What are the two types of equipment leases?

Finance leases and operating leases. A finance lease runs for most of the asset's life and the customer carries most of the risk. An operating lease is shorter and the lender takes more of the resale risk.

What does a lender check before it funds an asset?

The supplier's invoice or quote, that the asset exists and matches the order, who will use it, insurance, and whether the price is reasonable for the asset. It also runs the usual credit checks on the customer.

Is hire purchase regulated?

HP for limited companies is generally outside consumer credit rules. Sole traders and small partnerships can be inside them on smaller agreements. The lender should confirm the customer type and take legal advice if unsure.

Residual value: What an asset is expected to be worth at the end of the term
Debenture: Security over a company's assets
Debt service coverage ratio: Cash earned against loan payments due
Working capital loan: Short-term funding for day-to-day costs

This page is general information for lenders. It is not legal, tax or credit advice.