Management Accounting Short Note-'Hire Purchase finance'

A hire purchase, also known as a lease purchase, closed-end lease, lease-to-own or rent-to-own, is a business arrangement between a seller and a customer where the customer gets possession and use of the goods in return for a fixed number of specified monthly payments, but the seller retains ownership title rights until the customer has made the final payment. At that point, ownership title passes to the customer.

A hire purchase resembles an installment purchase, but with the crucial difference that title to the property stays with the seller during the hire term. The customer enjoys the economic benefits of ownership but also assumes the risks of damage or loss. The seller is able to account for the hire purchase as the equivalent of a sale. Normally, title to the property passes to the customer at the end of the agreement's term, but a hire purchase also can be structured so the customer takes ownership after a final balloon payment.