Strategic Management and Corporate Finance · Sources of Corporate Funding

Lease Financing, Hire Purchase and Securitisation Explained

Updated 11 October 2026 · Fact-checked

Lease financing lets a company use an asset by paying rentals while the lessor owns it. Hire purchase lets you pay in instalments and become owner on the last payment. Securitisation pools receivables, sells them to a special purpose vehicle, and issues securities backed by their cash flows. Answer by comparing ownership, risk, and cost.

Understand Lease Financing, Hire Purchase and Securitisation

Asset-based financing means you raise funds or gain use of an asset against the asset or its cash flows, not against the company's general credit alone. The three routes in this topic are leasing, hire purchase and securitisation.

A lease is a contract. The lessor owns the asset and gives the lessee the right to use it for an agreed period against lease rentals. In a finance lease, the lease runs for most of the asset's useful life, is generally non-cancellable, and the lessee bears the risks and rewards of ownership, including maintenance and insurance. The lessor mainly recovers its investment plus a return. In an operating lease, the term is much shorter than the asset's life, the lessor keeps the risks of ownership, and the lessor often provides maintenance and may lease the same asset again to others.

In hire purchase, the buyer (hirer) takes the goods, pays instalments, and becomes owner only when the last instalment is paid. Until then, the financier remains owner. Each instalment has a part for principal and a part for finance charge. In a lease, ownership normally never passes to the lessee, unless the contract gives an option to buy.

Sale and leaseback means a company sells an asset it owns to a lessor and leases it back at once. The company gets cash and keeps using the asset. It suits a business that has money locked in land, plant or buildings and needs working capital.

Securitisation converts illiquid receivables, such as loans, vehicle finance or lease receivables, into tradable securities. The originator pools the receivables and sells them to a special purpose vehicle (SPV). The SPV issues securities to investors, often after credit rating and credit enhancement. Investors are paid from the collections on the pool. The originator gets cash early and can lend again.

Key rules to remember

Finance lease: total lease payments: Total lease payments = Annual rental × Number of years (+ any guaranteed residual value); Finance charge = Total lease payments − Cost of the asset (when ownership risks sit with the lessee).
Hire purchase: finance charge: Finance charge = Total hire purchase price − Cash price; Total hire purchase price = Down payment + Sum of all instalments.
Hire purchase: financed amount: Amount financed = Cash price − Down payment; Interest is charged on this amount, and on the reducing balance if the question says so.
Present value of lease rentals: PV = Rental × Annuity factor at the discount rate; Compare with the cost of buying to decide lease or buy. Use the after-tax cost of debt as the discount rate when the question gives tax.
Lease vs buy decision rule: Choose the option with the lower present value of net cash outflow; Lease outflow = rental × (1 − tax rate). For buying, deduct the tax shield on depreciation and the present value of salvage value.

How to solve Lease Financing, Hire Purchase and Securitisation questions

Use this method for any theory or numerical question on leasing, hire purchase or securitisation.

1Identify the arrangement: finance lease, operating lease, hire purchase, sale and leaseback or securitisation.
2Name the parties: lessor and lessee, hirer and financier, or originator, SPV and investors.
3Decide who owns the asset and who bears the risks of ownership during and at the end of the term.
4For theory, compare the two arrangements on ownership, term, cancellation, maintenance, risk, accounting and tax treatment.
5For numbers, list the cash flows year by year: rentals or instalments, tax shield, salvage value, and discount rate given.
6Compute the present value of each option, or the finance charge and rate, and show each calculation line.
7State a clear conclusion in one line, then add one practical point such as cash flow effect or off-balance-sheet effect.

Quickest way: Compare on ownership and risk first

When to use it: Use this for 'distinguish between' or 'discuss' questions where time is short.

Write a two-column comparison with five rows: ownership, term, risk and maintenance, end of contract, and who suits it.
Add one example with a rupee figure to show that you understand the mechanics.
For securitisation, write the flow in order: originator, pool, SPV, rating, investors, collections.
Close with one advantage and one limitation.

Common mistakes in Lease Financing, Hire Purchase and Securitisation

Saying the lessee becomes owner at the end of every lease.
Students mix up lease with hire purchase.
Fix: Remember: ownership passes in hire purchase on the last instalment. In a lease, it passes only if the contract gives a purchase option and it is exercised.
Calling a lease finance lease only because it is long, without checking who bears the risk.
Students memorise duration and skip the substance test.
Fix: Test the substance: if the lessee bears most risks and rewards of ownership, it is a finance lease.
Treating the SPV as a part of the originator.
The SPV sounds like a subsidiary doing the originator's work.
Fix: Write that the SPV is a separate entity that buys the receivables, so the receivables are isolated from the originator's insolvency risk.
Using the full rental as the cost in a lease-versus-buy question with tax.
The tax shield is forgotten.
Fix: Use rental × (1 − tax rate) and discount at the after-tax rate, unless the question says otherwise.
Taking the whole hire purchase price as the finance charge.
Students forget to deduct the cash price.
Fix: Finance charge = total hire purchase price − cash price.

Worked examples

Example 1

Sharma Textiles Ltd buys a machine under hire purchase. Cash price is ₹10,00,000. It pays ₹2,00,000 down and four equal annual instalments of ₹2,50,000 each. Find the total hire purchase price, the finance charge and the amount financed.

Show the solution

Sum of instalments = 4 × ₹2,50,000 = ₹10,00,000.
Total hire purchase price = down payment + instalments = ₹2,00,000 + ₹10,00,000 = ₹12,00,000.
Finance charge = ₹12,00,000 − ₹10,00,000 = ₹2,00,000.
Amount financed = cash price − down payment = ₹10,00,000 − ₹2,00,000 = ₹8,00,000.

Answer: Total hire purchase price is ₹12,00,000, finance charge is ₹2,00,000 and amount financed is ₹8,00,000.

Example 2

Distinguish between a finance lease and an operating lease, and explain how securitisation of a bank's vehicle loans works. Answer in exam format.

Show the solution

Finance lease: term covers most of the asset's life, is generally non-cancellable, and the lessee bears risks and rewards of ownership, including maintenance and insurance. The lessor recovers its investment and return from the rentals.
Operating lease: term is short relative to asset life, the lessor keeps the risks of ownership, often maintains the asset, and can lease it again after the term. The rentals do not fully recover the cost.
Securitisation: the bank (originator) pools its vehicle loans, which are illiquid receivables, and sells the pool to an SPV.
The SPV funds the purchase by issuing securities to investors. The securities are usually rated and may carry credit enhancement.
Borrowers keep paying EMIs, and these collections pay the investors.
The bank receives cash immediately, improves liquidity and can make fresh loans. The credit risk on the pool moves to investors to the extent the structure provides.

Answer: A finance lease transfers substantially all the risks and rewards to the lessee, while an operating lease does not. Securitisation converts a pool of loans into rated securities sold through an SPV, giving the originator early cash.

Exam tips

Use a comparison table in your answer sheet for 'distinguish' questions. Five points are usually enough.
For numerical questions, show every line. Examiners give marks for method even if you make an arithmetic slip.
Always state ownership position at the end of the contract, since this is the key difference between lease and hire purchase.
For securitisation, draw a small flow diagram of originator, SPV and investors, and add a line on credit rating and enhancement.
Apply the facts of the case. If a company needs cash but wants to keep using plant, point to sale and leaseback.

Practice questions from Sources of Corporate Funding

Lease Financing, Hire Purchase and Securitisation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Lease Financing, Hire Purchase and Securitisation: frequently asked questions

What is the main difference between finance lease and operating lease?

In a finance lease the lessee bears substantially all the risks and rewards of ownership, and the term covers most of the asset's life. In an operating lease the lessor keeps these risks, the term is shorter, and the lessor often maintains the asset.

What is the difference between lease and hire purchase?

In a lease the lessor stays owner and the lessee pays rentals for use. In hire purchase the hirer pays instalments and becomes owner on paying the last one. Hire purchase instalments include principal and finance charge.

What is sale and leaseback with an example?

A company sells an asset it owns and leases it back from the buyer. For example, a firm sells its factory building for ₹5,00,00,000, receives the cash, and then pays rent to keep using it. It gets funds without stopping operations.

What is securitisation and how does it work?

Securitisation turns a pool of receivables into securities. The originator sells the pool to an SPV, the SPV issues securities to investors, and collections on the receivables pay the investors. The originator gets cash early.