If you’re looking for a new set of wheels but don’t have enough cash to a buy a car upfront, hire purchase finance could be the solution. We explain what a hire purchase agreement is and look at the pros and cons to help you weigh up whether it’s right for you.
What is hire purchase?
Hire purchase (HP) is a type of car finance that allows you to buy a car by spreading the cost over several months or years. It’s sometimes referred to as HP car finance.
You’ll usually put down a deposit and pay off the full value of the vehicle to a car finance provider in monthly instalments over a set period of time.
Once you’ve made the final payment, the car is yours to keep. You’re essentially only hiring the car until you purchase it outright at the end of the HP agreement and become the legal owner.
How does a hire purchase agreement work?
Once you’ve found a car you like, you can then start thinking about how you’re going to pay for it.
With a hire purchase agreement, you might need to pay a deposit of around 10% on the car you want, although this isn’t always necessary. But if you can contribute something at the start, you won’t need to borrow as much.
It’s worth using a car finance calculator to find out how much you could borrow. But make sure you never borrow more than you can afford to pay back.
Hire purchase car deals in the UK are generally available for between 12 and 60 months, with fixed interest rates. Your monthly repayment will depend on how much you’re borrowing, how big your deposit is and the length of the term (the period over which you pay back what you borrow) you sign up to.
The debt is secured against the car, so if you fail to keep up with your repayments the finance provider can claim back the vehicle.
Once all your repayments have been made, you can pay a final ‘option to purchase’ fee to buy the car outright. This will be around £100 to £200, to cover the admin costs of transferring ownership to you. Make sure you ask how much this will be when you take out the deal, so there are no nasty surprises.
Here’s a hypothetical breakdown of buying a car on hire purchase:
- Cost of car - £10,000
- Deposit - £1,000 (10%)
- Remaining balance - £9,000
- Fixed APR - let’s say 5%
- Length of agreement - five years
- Total interest to pay - £1,163.02
- Monthly instalments - £169.38
- Option to purchase fee - £200
- Total cost of car - £11,363.02
What are the advantages of hire purchase?
Getting a car on finance can be a good option for many motorists. The main advantages of hire purchase include:
- flexible payment terms – a HP car agreement offers you different repayment terms, typically from one to five years. Paying in instalments can also help you get a newer or better vehicle than you would otherwise be able to afford.
- easier to get credit – if you have a poor credit score, HP finance can be easier to get than a standard car loan as the car is used as security for the debt. But you may still be charged high interest and the rate you’re offered will depend on your individual circumstances.
- no mileage restrictions – unlike some car finance plans, HP doesn’t usually come with a mileage allowance. That’s because you own the car once you’ve made the final payment.
- no huge ‘balloon’ payment at the end – you spread the remaining cost after the deposit evenly over the entire length of the plan, so you’ll only have to pay the final option to purchase fee to transfer ownership to you.
Getting the best HP deal
While it’s most common to get your hire purchase finance through the dealership selling you the car, there are other finance deals available to you. This makes it well worth shopping around, to try and find the best hire purchase deal available. Here are some things to think about:
- Shop around – like we just said, while it’s very common (and easy) to just go with the option offered by the car dealer, you don’t have to. Take the time to learn more about your options. The dealer may offer a good deal, but there are plenty of online brokers who could set you up with a better deal.
- APR – this is a key figure, as it’ll determine how much you’re paying each month. Don’t immediately be blinded by a ‘representative APR’, as this is exactly that: representative. The representative APR is only what the lender needs to offer 51% of successful applicants, which means you could fall into the other 49% who get charged a higher rate. The only way you’ll find out is through an official application.
- Compare the overall costs – while the APR is one of the most important figures, it’s not the only one that matters. The price you’re paying will depend on the rate and the car you’re buying, so shopping around and cutting a better deal on the car itself will also see the overall cost of your deal change. You also need to be on the lookout for any additional fees, like a broker fee etc. These can add up and potentially make another deal (even one with a higher APR) cheaper.
The difference between franchise and independent dealerships with hire purchase agreements
If you get your hire purchase deal through a franchise car dealership, you’ll be getting your finance through the car’s manufacturer. This can be beneficial, because it can sometimes result in you getting a discount or a special rate, particularly if you’re buying a new car. However, they’re only one of many finance companies who can offer you a hire purchase deal.
If you go through an independent dealership, you might not get access to a discount or contribution towards the car, but it does allow you to compare many more options and potentially find a better deal.
Hire purchase and conditional sale
Hire purchase and conditional sale are two terms which mean a similar thing. Both involve you taking out finance deals with a car dealer or lender to make monthly payments for a car, but you won’t own the vehicle until you’ve paid the final instalment.
However, with a conditional sale, you’re obliged to buy the car at the end of the agreement, whereas a hire purchase agreement comes with an ‘option to purchase’ fee at the end. This means there’s a bit more flexibility on offer with a HP agreement, which may be more appealing to you. Although, because of this, it could be more expensive.
What’s the difference between hire purchase and leasing?
While hire purchase and leasing both offer ways to access a car through monthly payments, there’s a big difference. At the end of a hire purchase agreement, you’ll pay a final ‘option to purchase’ fee to the lender, before finally owning the car. When you’re leasing a car, it never belongs to you. Think of leasing as a long-term rental plan. You agree to lease the car for a set period, paying the monthly installments, before either returning it to the car dealer, or replacing it with another lease agreement.
You should know, both options will require a credit check, which means your credit rating will affect your ability to get a car on a hire purchase or leasing agreement. However, the credit score requirements for each may be different, which could make one a better option for you.
What happens if you miss your hire purchase payments?
Obviously, you should do your best to keep up with your hire purchase payments, but what happens if you miss a payment can vary among lenders. Failing to keep up with payments will break the terms of your agreement, which means you’ll likely be forced to pay additional charges. Some lenders may allow you to hand back the car and end your agreement, but this may still come with extra charges. Ultimately, as your finance deal is secured against the car, the provider can claim back the vehicle.
If you’re worried about missing a payment, it’s best to speak to your lender as soon as possible to discuss your options, rather than just letting it happen.
Hire purchase and your credit score
Buying a car through a hire purchase agreement will require a credit check, which means your credit score will be considered. This could be the difference between you being accepted or rejected, or influence the APR or other terms you’re offered. After that, keeping up with your payments will likely improve your credit rating over time, while missing payments will almost certainly have a negative impact on your credit score.
What other car finance options do I have?
Aside from hire purchase and PCP, you also have other options available to you when choosing how to finance the purchase of a new or used car, including:
- a personal loan – you can borrow a lump sum and spread the payments over as many as seven years without securing it against an asset (something you own). You’ll also own the car outright from the day the money is transferred to the dealer. That means you can modify or sell the vehicle at any time.
- car leasing – this is basically a long-term car rental agreement where you pay a monthly fee and hand back the car once the contract ends. It’s technically called a personal contract hire (PCH) agreement, and can be a good way to get a brand-new car if you’re not bothered about ever owning it.
Frequently asked questions
What are the disadvantages of hire purchase?
This type of car finance won’t be suitable for everyone. The main drawbacks of hire purchase deals include:
- high overall cost – monthly payments tend to be higher than for personal contract purchase (PCP) finance and leasing deals over the same agreement period. Interest rates are often higher than standard car loans.
- no modifications – you can’t modify or sell the car until you’ve paid it off, unless you get permission from your car finance provider.
- wait for ownership – you won’t own the car during the contract period so, if you can’t meet your repayments, the finance provider could seize the vehicle. You’ll only own it once the final payment has been made.
Can I change my car on HP?
If you’d like to change your car while still tied into a hire purchase contract, there are two options:
- Trade it in for a new model – car dealerships will usually offer you the chance to trade in your current car and swap it for a different model. However, you’ll need to keep in mind the terms of the agreement, and you’ll usually need to pay some sort of early settlement figure. This is because you’re effectively terminating your existing deal and taking out a new agreement. The car you’re trading in may contribute towards this fee though, and any surplus value could be used towards a new model. If the car’s value isn’t high enough, you may need to pay extra.
- Settle the agreement – this is simply terminating your hire purchase contract early. This will usually incur an early settlement fee, which would be listed in your current HP contract. You’ll then own the car, which you could then sell and use the money to buy a different car.
Can I sell my car if it’s on HP?
No, you can’t sell a car that you’ve purchased on a HP contract. This is because, until you’ve settled the agreement, you won’t own the car. Therefore, it isn’t yours to sell. Instead, you’ll need to settle the agreement early, before you can sell it.
Can you modify a car on HP finance?
Possibly, but you’ll need to check the terms of your hire purchase agreement and speak to your finance provider before making any modifications. This is because, until you’ve settled your HP agreement, you’re not the owner of the car, so it isn’t yours to modify.
Can I pay off my hire purchase deal early?
You’ll usually be able to pay off your hire purchase deal early. You should find an early settlement fee mentioned in your HP agreement. This is the fee you’ll need to pay your finance provider, in order to pay it off early. Although you’ll be paying an extra fee, you will save on the interest you’d have been paying over the rest of your agreement.
To settle your hire purchase deal early, simply talk to your finance provider and tell them you’d like to pay off the deal. They’ll confirm the early settlement fee, and you can go ahead from there.
What if there's a problem with the car?
If you buy a car on a hire purchase deal and find out there’s something wrong with it, you should return it to the dealer and ask for it to be repaired. If they refuse to repair it, contact your HP finance provider (they may be the same company). Your finance provider legally own the car, until you’ve settled your agreement, which means they’re also responsible for the car and any issues it may have.
Do I need GAP insurance?
If you’re buying a new car, GAP insurance is worth considering. This is because the value of new cars falls quickly during the first few years on the road. GAP insurance covers any shortfall in value, if your car is written off or stolen, between the market value and the price you paid.
Contract purchase vs hire purchase. Which is right for me?
Personal contract purchase (PCP) works in a similar way to hire purchase, but the key difference is that it’s based on the car’s depreciation rather than its total value.
While PCP monthly payments tend to be lower than HP, if you want to keep the vehicle at the end of the loan term you’ll have to pay off the remaining value of the car with a ‘balloon’ payment. This can be expensive. However, you could give the car back to the finance provider instead or part-exchange it using the equity you have in it as a deposit on your next car. So there is more flexibility with PCP.
But PCP deals usually have mileage limits and you may have to pay a fine for any excessive wear and tear if you hand back the car.
In a nutshell – if you’re looking for lower monthly repayments than other financing options and like to regularly upgrade your car, PCP could be a good option. But if you cover lots of miles and want to eventually own the car, a hire purchase agreement may suit you better. You’ll need to do the sums for yourself to make sure it’s right for you.