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| Automobile Finance : Financing Options |
| Loan |
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Under this option, you are the owner of the vehicle, and the vehicle is hypothecated to the financier as security.
Businessmen, companies or self-employed professionals are eligible for tax deductions against the interest paid, as well as depreciation, but not against principal repayment. Stamp duty may be applicable on loan agreements, and this varies from state to state. |
| Hire Purchase |
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Under this option, the financier purchases the vehicle (on your behalf), and in turn sells it to you on a hire purchase basis. It is similar to taking a loan, except that legally the vehicle belongs to the financier till all the instalments are paid.
Businessmen, companies or self-employed professionals are eligible for tax deductions against the interest paid, as well as depreciation, but not against principal repayment. Many states levy additional sales tax, turnover tax, value-added tax, stamp duty, etc. on hire purchase transactions.
This option is offered by most finance companies. |
| Financial Lease |
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As in hire purchase, in a lease too, the legal ownership of the vehicle rests with the financier. A lease rental is payable by you every month, which covers the principal as well as interest.
Under the lease option, the financier, not you, is eligible to claim depreciation on the vehicle. However, you can claim tax deductions on the full value of rentals paid.
Usually, at the end of the lease period, the vehicle is transferred to you (the lessee) at a prefixed nominal value. |
| Operating Lease |
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In general, any lease which is not a financial lease, can be termed as an operating lease. The financier is the registered and legal owner of the vehicle.
The vehicle is leased to you for a fixed tenure for which you pay rent. On the expiry of your tenure, the financier would take the vehicle back and maybe lease it to another party. In most cases, the financier takes care of insurance, maintenance, repairs and other such costs.
Operating leases are popular in the USA, but not too common in India. |
| Comparative Analysis |
| Parameter |
Loan |
Hire Purchase |
Lease |
| Ownership |
Owned by you |
Owned by financier |
Owned by financier |
| Registered Owner |
You |
You |
You |
| Depreciation Claimant |
You |
You |
Financier |
| Tax Benefit Available On |
Interest |
Interest |
Entire rental |
| Post Finance Ownership |
Not applicable, as you are the owner |
Ownership is transferred to you |
Vehicle to be returned or lease period to be extended |
| Taxes |
None |
VAT (Value Added Tax) if applicable |
Lease Tax if applicable |
| Stamp Duty |
Nominal |
Normally 1% of annual rental |
Normally 1% of annual rental |
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