Hire purchase loans
Hire purchase car finance
- HP car finance spreads the cost of a car so you don’t have to pay the full price up front
- Our trusted partner could help you find the right deal for your needs
- Comparing your finance options won’t harm your credit score
What is hire purchase?
Hire purchase (HP) is a type of car finance that lets you spread the cost of buying a car, usually over one to five years. It’s also known as HP car finance and could help make it easier to manage payments for a new set of wheels.
In a nutshell:
- You usually put down a deposit (typically 10% of the price).
- Make monthly repayments plus interest until the full value of the car is repaid.
- Pay an ’option to purchase' fee and the car is yours to keep.
Once your HP agreement is finished, the car legally belongs to you.
How do hire purchase loans work?
Once you’ve found a car you like that also matches your budget, you can start to think about how you’re going to pay for it.
With a hire purchase agreement:
- A deposit will reduce the amount you borrow – you can put down a deposit, typically 10%, although it isn’t always necessary. The more you can contribute at the start, the less you need to borrow.
- You can choose how many months to pay it back over – deals are generally available for between 12 and 60 months, with fixed interest rates.
- Make your monthly payments on time – the loan is secured against the car, so fail to keep up with your repayments and the finance provider may repossess the vehicle.
- Own the car after paying an ‘option to purchase’ fee – after your last monthly repayment, this final one-off fee allows you to take ownership of the car. The fee can be anything from £10 to £200, and covers the admin cost of transferring ownership to you.
Make sure you ask how much the ‘option to purchase fee’ will be when you take out the finance, to avoid any unpleasant financial surprises at the end.
The size of your monthly hire purchase repayment will depend on:
- How much you borrow
- The size of your deposit
- The time you take to repay the HP loan
Try putting your details into 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.
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?
Buying a car on finance can be a good option for many motorists. The main advantages of hire purchase include:
- Flexible payments – an HP car agreement lets you choose a repayment plan that suits you, typically from one to five years. Spreading the cost can help you get a newer or better vehicle than you would otherwise be able to afford.
- No mileage restrictions – unlike other types of car finance plan, a HP loan has no limits on how far you can drive.
- You avoid a big balloon payment to own the car – after paying a deposit, HP sees you spread the cost evenly over the loan’s life. To become the owner, you only need to pay the final ‘option to purchase’ fee. With a personal contract purchase (PCP), you typically pay a balloon payment (often thousands of pounds) when your agreement ends to own it outright.
What are the disadvantages of hire purchase?
There are several disadvantages to a hire purchase deal that mean it may not be suitable for you, including:
- High overall cost – monthly payments tend to be higher than for personal contract purchase (PCP) finance and leasing deals over the same agreement period.
- Car modifications are off limits – you can’t modify or sell the car until you’ve paid it off, unless you get permission from your car finance provider.
- Delayed 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.
- Limited options to change your car – you may have to pay a fee if you want to change to a different car before the end of the agreement.
Getting the best hire purchase deal
It’s very common to take out hire purchase finance through the dealership selling you the car. However, you don’t have to accept their deal since there will be other HP finance deals on offer.
Here’s what to consider:
Look at rival deals to see if they’re cheaper
It may well be convenient to settle for HP finance offered by the car dealer (and they may also offer you a good deal) but there are plenty of online brokers who could beat the dealership’s offer.
Check the APR
The APR (annual percentage rate) dictates how much interest you’ll pay on the money you borrow. The higher the APR, the more interest you pay.
Be aware of representative APR
A representative APR tells you that 51% of people who took out a car loan with a given provider did so with that rate of interest.
However, it doesn’t mean that you will too. Depending on your credit history and credit score, you may receive a lower or higher APR than the one advertised.
Compare the overall costs
While the APR is important, it’s not the only element to affect what you pay. The price will also depend on:
- The car you’re buying – hunting elsewhere for a better price on the car itself could have an impact on the overall cost if you bag a better deal
- Any additional charges such as a broker fee or admin fee – these can add up and make a deal more expensive, so double check what’s included.
The difference between franchise and independent dealerships with hire purchase loans
If you sign up for a hire purchase deal through a franchise car dealership, you’ll be getting your finance through the car’s manufacturer:
- This might secure you a discount or a special rate, particularly if you're buying a brand new model
- If you’re buying a used car on finance, be prepared to haggle for a discount since dealerships often have plenty of room for manoeuvre on price
But keep in mind that they’re only one of many finance companies who can offer you a hire purchase deal.
If you choose an independent dealership, you might not bag a manufacturer’s discount or contribution towards the car, but it does allow you to compare many more options and potentially find a better deal.
What's the difference between hire purchase and conditional sale?
Hire purchase and conditional sale are similar types of finance agreements. They both let you spread the cost of a car over monthly payments but you won’t own the vehicle until you’ve made the final payment.
- Conditional sale – the car automatically becomes yours once you’ve made your final payment
- Hire purchase – at the end of your agreement, you’ll have an ‘option to purchase’ fee. This is simply an admin cost to transfer car ownership but until you pay it, the car isn’t technically yours.
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 monthly instalments
- You then either return it to the car dealer or replace it with another lease agreement.
Both options require a credit check, meaning your credit rating will have an impact on your ability to secure a car through a hire purchase or leasing agreement.
However, the credit score requirements for each may be different, so one option may be more suitable for you than the other.
What happens if you miss your hire purchase loan payments?
You should always try to avoid missing any payments on your hire purchase agreement.If you fail to keep up with your payments, it’ll break the terms of your finance agreement which may mean:
- You’ll be forced to pay additional charges
- Some lenders might allow you to hand back the car and end your agreement, but this may come with extra charges
- Since your finance deal is secured against the car, the provider may repossess the vehicle.
If you’re worried about missing a payment, speak to your lender as soon as possible to discuss your options.
Hire purchase and your credit score
Buying a car through a hire purchase agreement needs a credit check, and your credit score will play a big part in deciding:
- Whether you’re approved for the loan
- What APR you’re offered
- How much you can borrow
What other options do I have?
Aside from hire purchase, you also have other options to consider when choosing how to finance the purchase of a new or used car.
These include:
Personal loan
A personal loan lets you borrow a lump sum and spread the repayments over a fixed number of years without securing it against a valuable asset such as the car itself or a property.
You’ll also own the car outright from the day the money is transferred to the dealer. This means you can modify or sell the vehicle at any time.
Learn more about personal loans.
Car leasing
Car leasing – also known as personal contract hire (PCH) – is basically a long-term rental deal. You pay a monthly fee, drive a brand-new car, and hand it back once the contract ends.
It could be a good option if you love the idea of driving new cars every few years and don’t mind not owning one.
Learn more about car leasing.
Cash savings
Buying a car with your savings is a good option for your finances since you’re not getting into debt, won’t pay any interest and you own the car outright – ideal if you want to modify it or sell it on at any point.
Bear in mind...A brand-new car loses a big chunk of its value when it leaves the forecourt, and up to 40% by the end of the first year. So other finance options may be worth thinking about if you’re buying brand new. |
Personal contract purchase (PCP)
PCP lets you finance a car without a commitment to owning it outright. Here’s how it works:
- You put down a deposit
- You then make monthly payments – these are usually smaller in size when compared with a hire purchase agreement for the same car.
- At the end of the agreement, you can trade the car in for a new model, make a final ‘balloon payment’ to own it, or hand it back.
You’ll need to stick to the agreed mileage and there might be other conditions such as a wear and tear policy.
Learn more about PCP.
Frequently asked questions
Can I change my car on HP?
It’s possible to change your car while still tied into a hire purchase contract. If you’d like to do this, 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. But keep in mind you’ll need to settle your existing finance..
Your current car’s value can contribute to this - and you could even use any extra value towards the new car. If not, you might need to top up the difference.
Settle the agreement
This is simply ending your hire purchase agreement early. You’ll normally have to pay an early settlement fee, which would be listed in your current HP loan agreement. You’ll then own the car, which you could then sell and use the money to buy a different one.
Can I sell my car if it’s on HP?
No, you can’t sell a car that you’ve purchased on an 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?
You might be able to modify a car on HP finance. You’ll need to check the terms of your hire purchase agreement and speak to your finance provider first.
This is because, until you’ve settled your HP loan agreement, you’re not the owner of the car, so it isn’t yours to modify.
Can I pay off my hire purchase loan deal early?
You’ll usually be able to pay off your hire purchase deal early, but you’ll likely need to pay an early settlement fee. This fee should be mentioned in your HP loan agreement. 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:
- You will need to talk to your finance lender and tell them you’d like to pay off any outstanding finance.
- 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:
- 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 owns the car until you’ve settled your agreement. This 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 – the gap between the market value and the price you originally paid – if your car is written off or stolen.
Contract purchase vs hire purchase. Which is right for me?
Deciding on whether contract or hire purchase is right for you depends on your individual needs.
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.
In terms of pros, PCP:
- Has monthly payments which tend to be lower than those for HP
- Gives you more flexibility as you could give the car back to the finance provider instead or part-exchange it. You could then use any equity you have in it as a deposit on your next car.
On the other hand:
- You’ll have to pay off the car’s remaining value with a ‘balloon’ payment if you want to keep it at the end of the agreement. This can be expensive to do.
- PCP deals usually have mileage limits.
- 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.
