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leasing and hire purchase
1) Leasing is a contractual agreement where the owner of an asset (lessor) grants exclusive use of the asset to another party (lessee) for an agreed period in exchange for rental payments. 2) Leasing is used to finance various types of assets for both consumers and businesses. Common assets financed include machinery, vehicles, equipment, and more. 3) There are different types of leasing agreements such as financial leases, operating leases, and leverage leases. Financial leases typically involve long-term agreements while operating leases are usually short-term.
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leasing and hire purchase
- 1. Term Paper on Leasingand Hire purchase Sub: Financial Management Presented By Hareesh.M 2014600120
- 2. Leasing DEFINITION OFLEASING Lease isacontract where bythe ownerof the asset(lesser) grantstoanotherparty(lessee),the exclusiverighttouse the assetusuallyforan agreedperiodof time inwrittenforthe paymentof rent. CONCEPTOF LEASING • Lease finance denotesprocurementof assetsthroughlease. • In India,the conceptwaspioneeredin1973 whenfirstleasingcompanywassetupinMadras and the eightieshave seenarapidgrowthof business. A lease isa contractual agreementinwhich: A party owinganasseti.e.lesser Providesanassetforuse to anotherparty i.e.lessee For an agreedperiodof time i.e.lease period For a considerationi.e.lease rentals MARKETING OFLEASING Generallythere are twotypesof marketinginleasing: • B2C • B2B Marketingof leasingisdone byfinancingmanykindsof assetstoconsumersaswell asbusinesswhich includes: • Plantand machinery • Businesscars • Commercial vehicles • Agricultural equipments • Hotel equipments • Medical and dental equipments. • Computersincludingsoftware packages.
- 3. • Office equipmentsetc. LEASEFINANCINGORGANISATIONSIN INDIA • NBFC • Private sectormanufacturingcompanies • Infrastructure leasingandfinancial servicesltd.(IL&FS). • ICICIbank • HDFC bank • LIC • Industrial reconstructionbank of India(IRBI). • State industrial investmentcorporations(SIICS). TYPES OF LEASE Financial Lease Operating Lease Leverage Lease Cross border Lease Wet & Dry Lease Vendor Leasing
- 4. TYPES OF LEASING •Financial lease- Longterm noncancellable leasecontract. Ex: Plant,Machinery,Building • Operatinglease- Shortterm,cancellable leaseagreements. Ex: Touristrentinga car, Hotel rooms • Leverage Lease- A leverage lease isusedforfinancingthose assetswhichrequire huge capital outlay- 50 lakhsto 2 crore.Assethas economiclife of 10 yearsor more.The Lessoracquiresthe assetsas perthe termsof the lease agreementbutfinancesonlyapart of the total investment, say 20%-50% • Sale and lease back-Special financial agreementinwhichthe usermaysell anassetownedby himto the lessorandlease itback fromhim.Example:shippingIndustry. • Cross border lease-A vendorleasingisone where the retail vendorstie upwiththe lease finance companieswhichgive financingoptiontothe customersof the vendorstopurchase a product. Thistype of lease ispopularinautofinance. 1) VendorLeasing 2) Wet lease &dry Lease MERITS OFLEASING • Convenience incase of shortterm need. • No riskof technologyObsolescence. • Efficientmaintenance services. • Low administrative andtransactioncost. • DebtEquityratio remainsunchanged. • Benefitsof Tax shield. DEMERITS OF LEASING • No benefitof residual value. • Highcost of leasing. • No benefitof ownership.
- 5. • Notflexible. • Chancesofdisputes. HIRE PURCHASE • Hire purchase is a type of instalmentcreditunderwhichthe hire purchaser,calledthe hirer, agreesto take the goodson hire at a statedrental,whichisinclusive of the repaymentof principal aswell asinterest,withanoptiontopurchase. • Hire purchase is usedtobuy expensiveitemswhichapersoncannotaffordto payoutright:e.g. a car • The ownershiportitle of the same istransferredonlywhenthe lastinstalmentispaid. FEATURES OF HIRE PURCHASE • Creditpurchase • Installmentpayment • Possessionattime of agreement • Ownershiptill lastinstallment • Terminationof the agreement • Ownershipof goodsafterall installmentspayment. TYPES OF HIRE PURCHASE • Consumerhire purchase • Industrial hire purchase ADVANTAGESOFHIRE PURCHASE • Spreadthe cost of finance. • Interestfree credit. • Higheracceptance rates. • Sales • Debtsolutions. DISADVANTAGESOFHIREPURCHASE • Personal debt
- 6. • Final payment •Bad credit • Repossessionrights. DIFFERENCE BETWEEN LEASING & HIRE PURCHASE LEASING HIRE PURCHASE OWNERSHIP OF ASSET Ownership lies with the lesser. The lessee has the right to use the equipmentand does not havean optionto purchase. The hirer has the optionto purchase. The hirer becomes the owner of the assets/equipments immediatelyafter the installmentis paid. DEPRECIATION The depreciationis claimed as an expense in the books of lesser. Here, the depreciation claim is allowedto the hirer. RENTAL PAYMENTS The rentalscover the cost of using an asset. Normally, it is derived with the cost of an asset over the asset life. The installmentis inclusiveof the principalamount and the interest for the time period the asset is utilized.
- 7. LEASING HIRE PURCHASE DURATIONLease agreements are generallydone for longer durationand for bigger assets like land, property etc. These agreements are done mostly for shorter durationand cheaper assets like hiring a car, machinery etc. TAX IMPACT The totallease rentals are shown as the expenditureby the lessee in the lease agreement. In hire purchase, the hirer claims the depreciationof asset as an expense. REPAIRS AND MAINTENANCE Repairsand maintenanceof the asset in financiallease is the responsibilityof the lessee but in operatinglease, it is the resposibilityof the lesser. In hire purchase, the responsibilitylieswith the hirer.
- 8. DIFFERENCE BETWEEN HIREPURCHASE AND INSTALLMENT SYSTEM HIRE PURCHASE INSTALLMENT SYSTEM OWNERSHIP Transfer of ownership takes place after the payment of all installments. In case on installment payment system, the ownership is transferred immediatelyat the time of agreement. TYPE OF CONTRACT The hire purchase agreement is like a contract of hire though later on it may become a purchase after the payment of last installment. In installment payment system, the agreement is like a contract of credit purchase. POSSESSION In case of default payment, in hire purchase system the vendorhas a right to back goods from the possession of the hire purchase. Here, the vendor has no right to take back the goods from the possession of the purchases; he can simply sue for the balancedue.