Hire purchase (HP) explained - Car Finance Guide
There are lots of different ways of buying a new or used car. Here, we look at the pros and cons of hire purchase...
What is hire purchase?
Hire purchase, or HP, was the most popular way of buying a new car before the introduction of personal contract purchase (PCP) schemes. It’s still popular for used car purchases. It is an instalment payment plan with regular monthly payments that enables you to have use of the car while you’re paying for it. You basically hire the car, while you’re paying for it, with the option to purchase it at the end of the deal.
How does hire purchase work?
You’re financing the cost of the car minus a deposit, which is usually around 10% of the car’s value. Depending on how much you can afford per month, you’ll pay for the rest of the car over one to five years with fixed monthly payments. The amount financed is usually subject to interest at a rate of 4 to 8%. There are 0% HP deals, but these usually require you to pay a larger deposit, sometimes 50%, up front.
What happens at the end of the hire purchase deal?
It’s important to note that you don’t own the car until the final payment has been made. At the end of the monthly payments, there’s likely to be a small ‘option to purchase’ fee, which you need to pay to become the legal owner of the car.
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 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 payments you owe.
2. Car companies are keener for people to buy on PCP rather than HP, so they often offer ‘deposit contributions’ of around £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.
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