Hire purchase (HP) explained - Car Finance Guide
Despite not being as popular as it once was, hire purchase is still a great way of spreading the cost of a new or used car. We explain how it works and whether it’s right for you...
The vast majority of new cars sold in the UK each year are funded via some form of finance. To many buyers, paying for their next car in monthly instalments makes a lot of sense. In addition to helping them avoid a massive short-term financial hit, financing a car lets drivers choose a model they couldn’t otherwise afford.
By far, the most popular method of financing a new car is currently personal contract purchase (PCP), but it hasn’t always been that way. Before the introduction of PCP, most people who paid monthly for their car did so via hire purchase (HP).
However, while it’s slumped in popularity in recent years, financing a new or used car through HP has a lot of benefits. Here, we share how HP schemes work and weigh up the pros and cons compared with alternatives.
What is hire purchase?
HP is a type of instalment payment plan that typically lasts between one and five years. At the start of the agreement, you’re charged a deposit – which is usually around 10% of the car’s value – and pay the rest over fixed monthly payments.
The amount financed is usually subject to interest at a rate of between 4% to 8%. You can also opt for a 0% HP deal, but these will typically require you to pay a larger deposit up front – sometimes as much as 50%.
What happens at the end of the hire purchase deal?
During the time in which the contract is in effect, you don’t own the car. However, once the final payment has been made, you’ll be able to pay an ‘option to purchase’ fee, which entitles you to legal ownership of the car.
What are the alternatives to hire purchase?
Of course, there are other ways and means of financing a car – each with advantages of their own. Here, you’ll find the other popular options and how they compare to a HP agreement.
Personal contract purchase (PCP) – the most common way to finance a new car. Under a PCP agreement, you pay a deposit and a fixed monthly fee for the rest of the contract. However, you’re not charged the full value of the car during the contract – instead having the option to either hand the car back to the dealer, trade it in for a new model using any excess value it has or pay an optional fee (known as a ‘balloon payment’) to become the legal owner of the car.
Personal contract hire (PCH) – sometimes called a personal lease. Under a PCH contract, you make an advanced rental payment (however many months in advance you’re willing to pay) and are charged a fixed fee thereafter. The key difference is that once a PCH contract expires, there’s no option to own the car.
Personal loan – an unconventional method that allows you to own the car from the start. By taking out a personal loan with your bank, you can buy the car outright and pay for it monthly. This is particularly effective if you plan to keep the car for a long period of time; however, there’s no way to end the loan agreement without paying it back in full.
Hire purchase advantages
1. You get to drive the car while you’re paying for it, so you don’t need all the money up front to buy it.
2. The final fee to buy the car outright is small (usually £100 to £200), unlike the far larger ‘balloon’ payment you need to make at the end of a PCP deal if you want to buy the car.
3. If you’re keen to own a car outright, this lets you do so while paying for it in instalments.
4. There’s no annual mileage limit, as there is with PCP and personal contract hire deals, so no matter how many miles you drive, you won’t have to pay an excess mileage fee.
5. The debt involved in a hire purchase agreement is secured against the car, so if you don’t have a strong credit rating, you’re more likely to be accepted for HP than for a personal loan.
Hire purchase disadvantages
1. You don’t own the car until the final payment has been made, so you don’t have the legal right to sell the car. If you do sell the car, the finance company might take action against you for any payments you owe.
2. Car companies are keener for people to buy on PCP rather than HP, so they often offer ‘deposit contributions’ of up to £1500 off the cost of a car with a PCP deal. They might also offer lower interest rates on PCP deals, so it’s important to check whether PCP or HP finance will work out cheaper overall; in many cases, PCPs are cheaper.
3. You’re financing the entire cost of the car – unlike a PCP deal, where you’re only paying for its depreciation – so the monthly payments will be higher.
4. Because the debt is secured against the car, the finance company could repossess it if you can’t meet the monthly payments.
Where can I get the best hire purchase deal?
The most common way of taking out hire purchase finance for new or used cars is usually from a finance company that either works for or is owned by a specific car maker. However, many other companies offer this form of finance, including online brokers, so it’s worth comparing any quotes you get from dealerships with those from brokers to see which works out cheapest overall.
Hire purchase FAQs
Can you buy a used car on hire purchase?
Yes, this is a popular way of buying a used car, especially if you’re not able to take out a personal loan.
What’s the difference between hire purchase and leasing?
The main difference between these two forms of finance is that you can buy the car at the end of an HP agreement, but there’s no option to buy on a leasing deal.
Can I terminate a hire purchase deal early?
If your circumstances change – for example, if you lose your job – once you’ve paid for at least half of the car, the Consumer Credit Act enables you to simply hand it back to the finance company and walk away without having to make any more payments. If you’ve not reached the halfway mark, you’ll have to pay the difference to the finance company.
You need to ensure the car is in good condition if you’re going to hand it back early; if it’s not, you’ll be charged for any work that’s needed to bring it up to scratch.
