Hire Purchase (HP) Explained

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Buying a car can be big decision, not only choosing the vehicle you want to drive, but also how you will finance the purchase. If you are unable to pay for the car upfront, Hire Purchase, otherwise referred to as HP, could be an option. Throughout this guide we have explained how Hire Purchase works, the benefits and drawbacks, and what to look out for to help you decide whether HP finance is suitable for you.

What is Hire Purchase?

Personal contract hire leasing explained

Hire Purchase (HP) is a popular choice of car finance for those who want to own a vehicle, but don’t have the funds to purchase outright. A HP agreement is similar to taking out a personal loan to fund a car, but with a couple of key differences.

For the duration of your HP contract you won’t own the vehicle, unlike if you were to fund a car using a personal loan. Instead, you only own the car once all repayments have been made, which will include your deposit, monthly payments and ‘optional purchase fee’ at the end of the contract.

The other main difference is that the debt is secured against the car, therefore if you can’t meet the monthly payments, the car could be repossessed by the finance company to pay off the debt. Essentially, this reduces the risk for the lender as the finance is secured, meaning you are more likely to get accepted for a Hire Purchase agreement if you’ve been declined for a personal loan.

How does Hire Purchase work?

Once you’ve found the car you want to purchase, you will be able to apply for Hire Purchase finance. To do so, you will need to pass a credit check, which will analyse your ability to meet the monthly repayments for the duration of your contract. It is essential that you ensure you can comfortably afford the monthly repayments specified in your Hire Purchase agreement before signing on the dotted line to ensure you don’t fall behind on payments, which could result in the car being repossessed and damage to your credit rating.

Most HP finance will require the buyer to pay a deposit, which is usually around 10%. Some dealerships offer deposit contributions on new vehicles, but the costs of these promotions may be recuperated elsewhere through a higher APR or an inflated list price. The remaining value of the car will be spread across a specified term, usually between 12 to 60 months.

Once all of the repayments on your Hire Purchase agreement have been made, you will have to pay an ‘Option to Purchase fee’ to transfer the ownership from the finance company. The amount will vary and will be specified in the contract. It is important to ensure you read the terms and conditions carefully before entering an agreement to ensure this figure is reasonable.

Hire Purchase example

You are purchasing a car for £20,000 from a local dealership:

  • A 10% deposit of £2,000 is required, leaving £18,000 owed on the car
  • You choose to opt for a 48 month agreement
  • The dealership is offering a 5% APR deal, which will mean you have monthly payments of £414.53
  • After you 4 years (48 months) you will pay the ‘Option to purchase’ fee of £100
  • In total, you would pay £21,997.31

Pros

  • You own the car after all repayments have been made, unlike PCP where there is a large balloon payment if you want to own the car
  • The terms are flexible, usually between 12 and 60 months. However, the longer the finance term, the higher the overall cost due to interest payments
  • Fixed monthly repayments allow you to budget for other expenses month-to-month and manage your finances
  • You are more likely to be accepted for a Hire Purchase agreement than a personal loan due to the finance being secured against the car
  • There are no restrictions on mileage for the duration of the agreement
  • You won’t be charged for excess damage to the vehicle from the finance company at the end of the agreement
  • Manufacturers may provide deposit contributions, particularly on new vehicles

Cons

  • If monthly payments are missed, the car could be repossessed by the finance company
  • A deposit of at least 10% of the car’s value is usually required
  • The car will be affected by depreciation, therefore the car could be worth considerably less than the cost at the end of the term
  • Monthly repayments are higher than PCP and PCH finance
  • You cannot sell the car until all payments have been made without permission of the finance company
  • The car cannot be modified until all payments have been received
  • The car must be comprehensively insured for the full duration of the Hire Purchase agreement

Ending a Hire Purchase agreement early

If you finance a car using Hire Purchase there is a clause in the Consumer Credit Act which allows you to get out of the contract early, which is known as ‘voluntary termination’. This clause allows drivers to terminate the agreement and return the car to the finance provider if at least 50% of payments have been made.

You may want to end your Hire Purchase agreement early for reasons such as your financial situation changing, if the car is no longer required or you have found a similar car at a lower cost elsewhere. However, if you do choose to terminate your HP agreement early, you will need to ensure that the car is in good overall condition, otherwise you will be liable for the costs of any repairs necessary.

If you want to terminate your HP agreement, but haven’t yet paid 50% of the amount in the contract, you will need to pay the difference before being able to apply for voluntary termination. You should also ensure that you keep a copy of any documentation to ensure the finance company can’t claim you defaulted on payments, which could have a negative effect on your finances and credit score.

Frequently asked questions

Yes, you will need to pass a credit check before being accepted for a Hire Purchase agreement to ensure you can afford the monthly repayments. The likelihood of being accepted for HP is higher than a personal loan due to the finance being secured against the vehicle, whereas a loan would be unsecured. However, if you fail to meet the monthly repayments, the car could be repossessed by the finance company.

Your credit check will appear on your credit file and be visible to other lenders. Initially, this will increase your risk to lenders and lower your credit score.

However, if you regularly make your monthly repayments, it’ll improve your credit rating over time. On the other hand, if you fail to make a payment, you will be marked as ‘default’ which could negatively impact your ability to borrow in the future.

Unlike other finance options, you can pay off your Hire Purchase contract at any time. There is also no additional fees for ending your agreement early. If you are looking to end your current Hire Purchase, you should contact your finance company.

You can reduce the monthly repayments by paying a bigger deposit at the beginning of your Hire Purchase contract, which reduces the amount you’re borrowing. Alternatively, you could spread the monthly repayments over a longer period, but this will result in paying more interest.

If a car is written off or stolen, insurance companies will usually only pay the value the car is worth. A gap insurance policy will pay out either the original sale price of a vehicle, the outstanding amount of finance, or the cost of buying an equivalent car at the time of the claim.

Gap insurance is usually a good idea when you’re purchasing a new car on HP as the value will depreciate as soon as the car leaves the forecourt. Therefore if the car is crashed or stolen soon after purchasing, you could be left with a hefty bill without.

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