What is Hire Purchase?

Spread the cost of buying a new car at low interest rates with Hire Purchase (HP) finance

BuyaCar team
Mar 29, 2019

What is Hire Purchase?

Hire Purchase (HP) is a type of finance that allows you to buy a car outright. The cost is spread over a series of fixed monthly instalments, usually for between two and four years. You'll own the vehicle as soon as the final payment is made.

It’s also referred to as Conditional Sale.

Hire Purchase advantages

✔  Spreading the cost of your car
✔  No mileage limits or charges for minor damage
✔  Option for no deposit
✔  Available for older vehicles

Hire Purchase disadvantages

The lowest monthly payments
Regularly upgrading your car
Flexibility at the end
Protection against unexpected value loss

 

Hire Purchase finance: how it works

Adjusting the deposit and agreement length will affect your monthly payments, so you can tailor HP finance to suit your circumstances.

1. Deposit & delivery

  • A deposit reduces the amount owed and may be optional

2. Monthly payments

  • Pay for the rest of the car in fixed monthly instalments

3. You own the car

  • Once the final payment is made, the car is yours.

   

Used car Hire Purchase

Hire Purchase is available for new and used cars. If you're looking to keep a used car for several years, then HP could be the best option, as your deposit and monthly payments will cover the full cost of the car. Monthly instalments are higher than other types of finance such as Personal Contract Purchase (PCP) but, unlike those arrangements, there's no lump sum to pay at the end if you want to own the vehicle.

Hire Purchase is the most common type of finance offered on older used cars because it's simple for lenders and customers to understand: the cost of the car (plus interest) is simply divided into equal monthly payments.

Other types of finance, such as (PCP) require the lender to estimate the car's value at the end of the agreement, which can be extremely difficult for vehicles that are more than five years old.

 

What are the best Hire Purchase deals?

There are often incentives and low interest deals available for HP purchases, which help reduce your monthly payments.

If you're buying a new car, then you may be offered a 0% interest deal, which offers substantial benefits because there's no interest to pay. These are rarely found for used cars, but low-rate HP finance will keep interest payments as low as possible.

If low monthly payments are your priority, then you can increase the deposit that you pay at the beginning of the agreement. As this reduces the amount that you then owe, you'll pay less each month. This also reduces the amount of interest that you pay because you are borrowing less.

You can also make your monthly payments more affordable by taking out an HP agreement over a longer term (four years instead of three, for example). Because you'll be repaying the money over a longer period, then you will pay more interest over the course of the agreement, unless you have a 0% interest deal.

 

HP vs PCP vs PCH - which is best for me?

If you’re not planning to keep your car at the end of your term, then a lease-type agreement will usually offer more affordable monthly payments and a simpler process at the end.

You could take out a Personal Contract Hire (PCH) finance package, which is a straightforward new car lease. You make a series of monthly payments and then hand the car back at the end.

A Personal Contract Purchase (PCP) agreement allows you to do the same for new or used cars, with the option to hand your vehicle back and walk away at the end. You also have the added flexibility of being able to buy the car for a lump sum once you have made your final monthly payment. And if the vehicle is worth more than that lump sum, then you'll have a third option of trading in the car and using the difference towards your next vehicle.

Both of these arrangements offer lower monthly payments than an equivalent HP deal because they don't cover the full cost of the car. Unlike Hire Purchase, you don't automatically own your vehicle at the end.

Leasing also means that you don't have to worry about the car losing more value than expected because the finance company takes that risk. There's also no need to sell it on yourself when you want to change your car, as you would with Hire Purchase.

 

   

How are Hire Purchase payments calculated?

It’s really simple: over the course of the deal you pay the full cost of the car, plus any interest. If you put down a £1,000 deposit on a £10,000 car, it will leave you with £9,000 to pay over the next three years, which is £250 a month plus interest.

You may be eligible for a deposit contribution, where the seller pays your deposit. Low interest, or even 0% interest deals are also available on some cars.

 

Do I own the car?

As long as you make all of your scheduled monthly payments, then you will own your vehicle at the end of your agreement.

Until then, the car remains the property of the finance company, so you won’t be able to sell it mid-contract, or modify it - by fitting a tow bar, for example -  without the agreement of the lender.

 

Can I cancel an Hire Purchase contract?

You can walk away early and hand the vehicle back but you’ll be left with no car to show for it. Depending on the value of the car at the time, and the amount that you have repaid, you may need to make an additional payments.

There is an option called voluntary termination, set out in the 1974 Consumer Credit Act, which allows you to return the car without additional cost once you have made half of your payments. If you haven't yet got that far, then you can activate the voluntary termination by settling with a lump sum that takes your total repayments to the halfway mark. Voluntary termination would leave you with no car. 

If you find yourself in a position to pay your contract off early, you'll own the car immediately and will usually pay less interest than if you had continued to make your monthly repayments at the original rate. Your lender will be able to provide the total settlement figure at any point during the finance term.

Do I need Hire Purchase GAP insurance?

Guaranteed Asset Protection (GAP) insurance can reduce the risk that you're left with no car and finance repayments owing after a big crash.

It is sometimes needed to cover the difference between an insurance payout and the amount still owed on your finance agreement.

GAP insurance may be useful for Hire Purchase agreements where there is no - or a small - deposit on a fairly new car. In these cases, the value of the car can initially drop quickly - far faster than the rate of your repayments.

If you are involved in a crash where the car is written off during this period, then the insurance payout would normally only cover the vehicle's value at that time.

If your car is worth substantially less than when you bought it, then you may find that there's a gap between the payout and the amount that you owe your finance company. This can be covered by GAP insurance.

However, GAP cover is not always needed with HP. If you have a brand new car, then your comprehensive insurance cover will often replace your vehicle with a brand new car in the first year.

After this, your deposit and repayments may well add up to more than the car's loss of value.

If you're buying a used car with a reasonable deposit of 10% or more, then your car may never be worth less than the amount that you owe, which would make GAP insurance unnecessary.

 

     

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