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 hire purchase work?
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 an online car hire purchase 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.
Why buy a car using 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.
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.
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.
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.