Definition: The Hire-Purchase is a kind of a lease agreement wherein the hiree, the counterpart of lessor purchases the asset and gives it on hire to the hirer, the counterpart of the lessee in exchange for the fixed number of periodical installments inclusive of the interest amount and the principal amount.
In the case of a Hire-purchase agreement, the hirer is supposed to pay interest along with the principal amount. The interest is usually charged on the amount initially paid by the hiree on the purchase of the investment and not on the diminishing balance. It differs from the traditional lease agreement in one of the following forms:
- In the case of a hire-purchase agreement, the hirer can claim depreciation for the tax purposes while in the case of a lease agreement the lessee cannot claim any depreciation.
- Only the interest component in the hire-purchase installment is tax deductible, whereas, in the case of the lease agreement, the entire lease rent is tax deductible.
- One of the differences between hire-purchase and the lease agreement is that, in case of the former type the hirer is the owner of the property and hence, enjoys the salvage value of the asset, while in the latter form, the lessee is not the owner of the property and thus, do not enjoy the salvage value.
Thus, in the case of a hire-purchase, the possession of property gets immediately transferred to the hirer, and the payment for the same is made in an equal number of installments. But however, the ownership of the property gets transferred only with the payment of last and final installment. A car purchase is a very good example.