Difference Between Hire Purchase vs. Installment Purchase

Difference between Hire Purchase vs.
Installment
Purchase
Both hire purchase and installment sale are popular methods of financing goods. These
methods are different to each other in terms of their option to purchase, a right of termination,
and transfer of ownership.Hire purchase is defined as an arrangement between hirer (buyer
or User) and seller of an asset whereby the seller allows the hirer to use the asset for a
regular payment of installment for the purchase price. The buyer also has the option to
purchase the goods on payment of all the installments. Whereas installment purchase is
defined as another method of financing the capital goods / assets whereby the goods are
purchased by the buyer but the payment is made in smaller installments.
HIRE PURCHASE VS. INSTALLMENT PURCHASE

Both hire purchase and installment purchase may look similar as both are a method of
finance and payment in both the cases is made in smaller parts. In that impression, it is
interesting to know the differences between the two. Following are the points of differences in
these two methods of financing.
TIME OF PURCHASE AND OWNERSHIP

In the case of hire purchase, the act of purchasing takes place only when whole payment is
made to the financing company. It means after making payment of the last hire charges /
installment only, the goods are considered purchased or if the buyer or hirer prepays in a
lump sum in between the agreed period for purchasing the goods. In the case of installment
purchase, the purchase happens as soon as the agreement between the buyer and financing
company is entered into. In hire purchase, both ownership and purchase is delayed till the complete
payment whereas in installment purchase, purchase and ownership take place before the complete
payment.
OPTION / RIGHT TO TERMINATE

The hirer, in the case of hire purchase agreement, has an option / right to terminate the
agreement and return the goods whereas there is no such right or option available to the
buyer in case of installment purchase. This is because the purchase has not taken place in
case of hire purchase but it takes place at the beginning only.
INSTALLMENT/HIRE CHARGES
The monthly or period payment in installment purchase is termed as installment whereas, in
hire purchase arrangement, it is called hire charges. Installment derives its value from the
length of time, the sale value of an asset, and interest rate whereas the hire charges is a
function of two additional factors viz. option of termination and repairs and maintenance.
Ideally, the installment should be less than the hire charges for the same asset. Therefore,
hire purchase is an expensive system compared to installment purchase.
Difference Between Hire Purchasing and
Leasing
If you want to use an asset, you don’t need to purchase it from the seller. There are many offers
whereby, you can use the asset just by paying the price for using it, such as Hire Purchasing and
Leasing. The former is a business deal in which the purchaser of the asset, pays a small amount at the
beginning and the rest of the price in installments. On the contrary, the latter is an agreement between
two parties in which the lessor purchases the asset and permits the lessee, use the asset for the payment
of monthly rentals.
Definition of Hire Purchasing
Hire Purchasing is an agreement, in which the hire vendor transfers an asset to the
hire purchaser, for consideration. The consideration is in the form of Hire
Purchase Price (HPP) which includes cash down payment and instalments. The
hire purchase price is normally higher than the cash price of the article because
interest charges are included in that price. The instalment paid by the hirer at
periodical intervals up to a specified period. The instalment is a sum of finance
charges i.e. interest and the capital payment i.e. principal.
 In the books of hire vendor:
o Interest Suspense Method

o Sales Method
 In the books of hire-purchaser:
o Interest Suspense Method
o Cash Price Method
Definition of Leasing
A contract in which one party (lessor) permits to use the asset for a specified
period to another party (lessee) in exchange for periodic payments for a specified
time is known as Leasing. Accounting standard – 19 deals with leases which apply
to all the enterprises, subject to certain exemption.
 Operating Lease: The lease which covers only a small part of the useful life of
the asset is Operating Lease. In this kind of lease, there is no transfer of risk
and rewards.
 Finance Lease: A lease agreement to finance the use of the asset for the
maximum part of its economic life is known as Finance Lease. All the risk
and rewards incidental to the ownership is transferred to the lessee with the
transfer of the asset.
Comparison Chart
BASIS FOR
HIRE PURCHASING LEASING
COMPARISON
Meaning The deal in which one party Leasing is an agreement where

can use the asset of the other one party buys the asset and
party for the payment of allows the other party to use it
equal monthly installments by paying consideration over a
is known as Hire specified period is known as
Purchasing. Leasing.
Governing No Specific Accounting AS- 19

Accounting Standard
Standard
Down Payment Required Not Required
Installments Principal plus interest Cost of using the asset
Asset type Car, trucks, lorries etc. Land and Building, Property.
Ownership Ownership of the asset is Transfer of ownership depends

transferred to the hire on the type of lease.
purchaser on the payment of
the last installment.
Repairs & Responsibility of hire Depends upon the type of lease

Maintenance purchaser.
Consideration Initial payment plus Lease Rentals

installment.
Duration Short Term Comparatively Long term

BASIS FOR
HIRE PURCHASING LEASING
COMPARISON
The Differences Between Installment Sales

and Credit Sales
Installment sales and credit sales are quite similar. Each is a form of credit that
provides a way for goods to be delivered and the payment for the goods to be
deferred to a later date. However, there are two key differences between installment
and credit sales: time to repay and collateral. While a credit sale is a short-term
payment deferral option, an installment sale is generally stretched over many years.
Collateral refers to the type of assets used to secure the credit.
Credit Sales vs. Installment Sales

Credit sales are a way that businesses can offer customers a payment deferral option
for a short period of time. The typical time frame for a credit sale is 90 days or less.
Oftentimes, a discount is given on a credit sale if full payment is received within a
specified number of days.
Credit sales are very common in the business world and dominate company-to-
company transactions. Many companies use a combination of cash and credit sales
and investors often try to distinguish between the two types in order to determine a
firm's percentage of credit sales.
Installment sales also allow deferred payment, but there are no discounts for early
payment. Installment sales encompass much longer time periods compared to credit
sales. In addition, the seller maintains an ownership interest in the goods sold until
the balance due is received in full. That is, the goods serve as collateral for the credit.
Examples of Credit and Installment Sales

If a company purchases inventory from a manufacturer in a credit sale with a 5/10 net
30 term, this means the company has 30 days to make the full payment; however, if
payment is received within 10 days, the customer receives a 5 percent discount. A
credit sale is also final, and ownership of the goods is transferred at the point of sale.
There is no lingering interest in the goods or product from the seller.

Difference Between Hire Purchase vs. Installment Purchase

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Difference between Hire Purchase vs.

HIRE PURCHASE VS. INSTALLMENT PURCHASE

TIME OF PURCHASE AND OWNERSHIP

OPTION / RIGHT TO TERMINATE

Definition of Hire Purchasing

 In the books of hire vendor:

o Interest Suspense Method

Meaning The deal in which one party Leasing is an agreement where

Governing No Specific Accounting AS- 19

Down Payment Required Not Required

Installments Principal plus interest Cost of using the asset

Ownership Ownership of the asset is Transfer of ownership depends

Repairs & Responsibility of hire Depends upon the type of lease

Consideration Initial payment plus Lease Rentals

Duration Short Term Comparatively Long term

The Differences Between Installment Sales

Credit Sales vs. Installment Sales

Examples of Credit and Installment Sales

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