Rhiannon Philps
If you’re looking to buy a car on finance, you have probably come across a plan called HP, or hire purchase.
This is a popular form of car finance that allows you to spread the cost of a car over an agreed period of time, but how does hire purchase work and what are the advantages and disadvantages?
What is hire purchase?
Hire purchase is one of the main types of car finance that allows you to drive off in a car without paying the full cost upfront. It’s basically a loan that is secured against the value of your car.
You will usually put down a deposit and then take out hire purchase finance to cover the rest of the cost of the car, which you will repay in monthly instalments over an agreed period.
While you are making the payments, you are effectively “hiring” the car from the finance company. Once you reach the end of your contract and have made your final payment, you can then pay an “option to purchase” fee to become the full owner of the vehicle. Most people will usually choose to do this as it will typically be an insignificant sum compared to the value of the vehicle, but it may not be worth doing so on less expensive cars.
» MORE: What’s the difference between hire purchase and PCP?
How does hire purchase work?
To buy a car with hire purchase, you typically need to pay a deposit upfront. The deposit is usually at least 10% of the car’s value, but individual lenders may offer finance with a smaller deposit.
However, bear in mind that the smaller your deposit, the more you will have to repay and the more expensive your finance agreement is likely to be overall.
After paying the deposit, you will then pay off the remaining value of the car, plus interest, via monthly repayments, to the finance provider. Hire purchase terms tend to range from 12 to 60 months.
During the hire purchase contract, you will be registered as the vehicle’s “keeper” but the finance provider will be the legal owner of the car. This means that, should you fall behind on your payments, the provider could repossess the vehicle.
At the end of the contract, you can choose to keep the car and become its legal owner by paying a final “option to purchase” fee. This will often be smaller than your usual monthly repayments and can be as little as £10, but you should check the terms of your contract to see exactly how much you would need to pay.
If you have repaid more than 50% of the total amount you owe under your hire purchase agreement, you can end the contract early and return the car. This is known as voluntary termination. Ending the contract in this way won’t harm your credit rating but it could show up on your credit file and some lenders may look at this negatively if this is something that is done frequently.
» MORE: How to cancel car finance
Hire purchase example
Cost of car: £18,000
Deposit: £2,000
Balance left to pay: £16,000
APR: 5.8%
Length of contract term: 3 years/36 months
Monthly repayments: £484.23
Total amount payable (excluding deposit and any extra fees): £17,432.17
Cost of the loan: £1,432.17
Total cost of car on HP: £19,432.17 plus final option to purchase fee
If you want to purchase the car at the end of the contract, you would need to pay the additional final fee on top of this total amount.
Advantages and disadvantages of hire purchase
Advantages of hire purchase
- Available on new and used cars.
- Helps you to spread the cost of a car if you don’t have the cash to buy one upfront.
- Has fixed interest rates and monthly repayments.
- You only need to pay a relatively small deposit.
- Could help people with a poorer credit score to buy a car as the finance is secured against the vehicle, unlike an unsecured personal loan.
- You have the option to own the vehicle at the end of the contract.
- Only charges a small final fee to own the car.
- Doesn’t usually come with mileage restrictions, unlike PCP or a lease.
Disadvantages of hire purchase
- You aren’t the legal owner of the car until you’ve made all the payments.
- If you miss any payments, the lender could repossess your car.
- You won’t be able to modify or sell the car while you are making payments, unless you get permission from the lender.
- Monthly payments could be higher than other finance options, such as PCP or leasing, as HP covers the cost of the whole car.
- Because you pay interest, you will end up paying more in total than if you paid for the car upfront in cash.
- Can come with a higher interest rate than a standard unsecured loan, although this will depend on your credit score.
- To get the best hire purchase deals and rates, you will need a good credit score.
- Some lenders may not be able to offer finance for certain cars e.g., if you buy from a private seller.
Who is hire purchase for?
Hire purchase may be a good option if you don’t have the money to buy a car outright. Because it allows you to pay for a car in monthly instalments, it can help people to get a car who would otherwise struggle to afford one.
Hire purchase is particularly useful if you will want to own the car at the end of the agreement. If you want to replace your car with a newer model after a few years, then PCP or a lease may be more suitable.
You can use hire purchase to buy a new or a used car.
Hire purchase is one of the more popular ways to finance a used car since it doesn’t normally come with age or mileage restrictions. In fact, over 57% of people who bought a used car on finance in 2020 did so through hire purchase, according to the Finance and Leasing Organisation.
Where can you get hire purchase from?
You can use hire purchase to buy both new and used cars from dealerships, and sometimes from private sellers. However, different lenders will have their own restrictions and may not be able to provide finance in all cases.
You can get hire purchase directly from most car dealerships, but it is also available from independent brokers too.
If you get car finance from a broker, you will often be able to use the finance to buy any vehicle from any approved dealer, as long as it meets their individual terms and criteria. The broker will then send the required amount to the car dealer once all the paperwork is complete.
Before deciding where to get your car finance, it is worth comparing options from different providers, including dealerships and online brokers.
Many providers will allow you to check your eligibility online without affecting your credit score, so you can see how much you could potentially borrow and at what rate. By looking at the APR and total cost of different deals, you can assess different hire purchase contracts and compare them with other finance options to help you work out which is best for you.
Source: Getty Images
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