Difference between Hire Purchase vs. Term Loan

Hire purchase is a type of contract of purchase in which the seller/financier rents the asset for an agreed period of time in return for a set of monthly installments. The buyer obtains ownership only when the full amount of the contract has been paid to the financier/seller of goods. So, the buyer doesn’t own the asset until the last installment.

The term loan is a financial assistance provided by banks and special institutions for lending money. In case the buyer needs the ownership of the asset as and when he purchases, then he can opt for “Term Loan Financing”. After assessing his net worth and financial position, the banks or special institutions provide the required amount to the borrower, restricted to his financial credentials.

In return, the provider asks for interest at a certain rate upon the principal, which the borrower has to pay together with the principal amount in installments. For purchasing an asset, or for any sort of expansion, the term loan is an easy option to arrange finance in a short span of time.

Hire Purchase  vs. Term Loan

In Easier Terms: Should I Hire or Should I buy?


In hire purchase, the seller/financier owns the asset until the buyer makes the final payment and hence the word “Hire” is used. Whereas in the term loan, the buyer borrows money, pays for the asset, and own it immediately. So, in the case of hire purchase, one cannot sell the asset if he runs into problems making periodic payments but in the term loan, it can be sold.

Cost of the Asset

The cost of the asset in case of the term loan is the cost at which the buyer purchases + installation cost if any, whereas, in the case of hire purchase, the cost to the buyer is normal cash price + HP Interest. The interest cost is incurred in case of term loan also but that forms part of finance cost of the company and is not capitalized with the asset.

Repossession of the Hired Asset

It may happen that the buyer is unable to pay all the payments required under the agreement. Once the buyer stops making the installments, the seller/financier has the right to take away the asset. This is called Repossession. In term loan, the borrower can only take away the assets which are provided as security against the loan. Normally, the purchased asset is the primary security of the term loan along with the collateral security. So, the bank or financial institution can take away the underlying asset as well as the collaterals.

Mortgage of Assets in the Form of Security

No security, in any form, is required for taking an asset on hire. Whereas the borrowers need to pledge his assets as security in case of the term loan.

Lend And Borrow Keys Showing Borrowing Or Lending On The InterneFinancial Statements

In hire purchase, the value of the asset is not included in the financial statements since the owner is the financier company till the buyer pays the last hire charges installment. Whereas in the case of a loan, the value of asset appear on the asset side and a corresponding liability for loans against such asset appear on the liability side.

Effect of Taxation

In both the cases, i.e. when the asset is purchased by loan, or if it is taken on hire, the user of the asset can take deduction on the depreciation of the asset (which decrease every year due to written down value effect) and also for interest on term loan or hire purchase installments. The only difference being in the quantitative amount of interest.

Cash Flow

Since there is no purchase of an asset in hire purchase, the cash flow is limited up to the hire purchase installments. Whereas in a case of the term loan, the cash flow includes down-payment, loan received, purchase of asset and installment paid at the required time.

The risk of Holding the Asset: In the case of hire purchase, there is an option called “The Half-Rule” which states that the user can return the asset and terminate the agreement at any time giving the seller/ financier a notice in writing. Whereas in the case of loan financing, the user of the asset has to bear all the risk of asset devaluation due to change in technology.


With a term loan, one can use the lump sum borrowed to pay for the asset and take immediate possession whereas if one takes assets on hire, a deposit is paid to take possession and the remainder of the purchase price is repaid by fixed installments over a fixed period. Legal ownership is obtained only after payment of final installment.

Last updated on : February 1st, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

Euro Issues
  • Rights Issue of Shares
    Rights Issue of Shares
  • Bonds and their Types
    Bonds and their Types
  • How is Debenture different from Bank Loans, Equity Shares and Bond?
    How is Debenture different from Bank Loans, …
  • Global Depository Receipt
    Global Depository Receipt
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    payout policy definitiondifference between accounts payable and notes payablecashplus business overdraftnet income formulasytm equationwhat is the difference between direct expenses and indirect expensescurrent cost accounting advantages and disadvantageswhat are debentures and bondshypotheticationsimple bank overdraftod loan meaningasset hindi meaningliquidation valueasset management ratio definitionhow to calculate trade discountdiscounted dividend modelbills receivable account formatoperating lease versus capital leasewhat is operating cycle in financebudgeting variance analysisformula acid test ratiogordon growth formulashareholders equity calculatordisadvantages of traditional budgetingnet fixed asset turnover ratiodefinition asset turnoveroverhead variance analysiswhat is bookkeeping definitionfactoring services definitionbeneficiary definition in bankingbusiness overdraft facilityleasee vs lessorrevolving letter of credit exampledu pont formularoce formulasemi variable cost definition examplessales turnover ratio formulainvoicing discountingdefine profit maximisationquick ratios formulaformula for operating leveragewhat is dscrlong term sources of finance advantages and disadvantagesearning capitalization modelprofit margin for rocedebenture loan definitiondifference between financial accounting and auditingirr method of capital budgetingaccount receivable turn overdefinition of installment buyingfactors of macro environmentconcept of capital rationingdebited and credited meaningus gaap depreciationdebit and credit definition in accountingroa calculation examplepayback accountingtakeover defense mergers and acquisitionswhat is conglomerate integrationhindi meaning of expenseshow are constant growth stocks valuedcalculating depreciation tax shieldaverage collection period ratio analysisdebtors collection period ratio analysisdisadvantages of long term financingdifference between irr and npvr&d ifrsmonthly debtor days calculation formulaexample of inventory turnoversimplified straight line depreciationoperating leases vs finance leaseslong term finance advantages and disadvantagesaccount receivable ratio formulayield to maturity formula exampleconversion ratio for convertible bondsdebt ratios formula