What is Hire Purchase (HP)?

Hire purchase, or HP, is one of the many ways to fund the purchase of a vehicle. Hire purchase may be suitable for someone who knows that they want to commit to buying a car rather than leasing, but still wants the flexibility of monthly payments rather than having to spend thousands buying a car upfront.

A hire purchase agreement follows a similar format to leasing and Personal Contract Purchase (PCP). You will pay an initial deposit, followed by an agreed number of monthly payments, with options usually available over between one and five years. The main difference is that at the end of the contract, you will pay a final fee after which you own the vehicle.

Monthly payments for hire purchase are much greater than in an equivalent PCP deal; there is no large balloon payment at the end of an HP contract, so this cost is distributed across the duration of the deal.

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As you will own the vehicle once the contract ends, you need to think carefully about whether the car is one you will want to keep. If it is, you could also consider a personal bank loan; this will allow you to take ownership of the car straight away, and may offer a lower interest rate than a hire purchase deal. You will be the registered keeper in either case.

For either of these options, you must also consider how steeply the car will depreciate, especially with a new car, as it could significantly drop in value over a multiple-year contract. If you want to terminate the agreement early, the car may not be worth as much as the outstanding finance, and you will be liable for the difference.

Here are some positives for hire purchase and some things to remember.

Positives:

• There are no mileage restrictions. Unlike PCH or PCP, you do not need to estimate your mileage at the beginning of the agreement, which means you'll never face excess-mileage fees.
• Once you have made your final payment (as well as the option-to-purchase fee) you will have full ownership of the vehicle.

Remember:

• You cannot sell the vehicle without first settling the finance.
• You will not own the vehicle until you have made all of the repayments.
• You need to keep the vehicle insured, maintained properly and in your possession until the full value of the car has been paid off.
• The monthly payments can be more expensive than the payments for other finance options, because you pay off the full value of your chosen car.

So, is hire purchase the right option for you? It is perfect for those wanting to purchase a car or van but who cannot afford to buy it outright. It is also great for those who cover a high annual mileage, because the mileage is not monitored.

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