What is Hire Purchase (HP)?

Hire Purchase (HP) finance helps you to spread the cost of buying a car - with low interest rates often available

BuyaCar team
Aug 29, 2019

What is Hire Purchase (HP)?

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 lasting between two and five years. You'll own the vehicle as soon as the final payment is made.

While another form of finance - known as Personal Contract Purchase (PCP) - provides lower monthly payments, drivers looking to own the car at the end of the contract will pay less overall with Hire Purchase.

Drivers also don't have to find a substantial chunk of money to pay a very large final payment - known as the optional final payment - to own the car with Hire Purchase as they would with PCP. HP is also referred to as Conditional Sale.

Hire Purchase advantages

✔  Spreads cost of a car across monthly payments
✔  Less interest charged than with PCP equivalent
✔  No large final payment as with PCP if buying car
✔  Available for new or old cars, no-deposit option

Hire Purchase disadvantages

Monthly payments higher than with PCP finance
Unlike loan you don't own car until final payment
Higher instalments may limit your choice of car
You lose out if car value falls faster than expected

 

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. If you can manage a large deposit you'll reduce your monthly payments and interest charges. On the other hand if you can't afford a substantial upfront payment, many low-deposit and no-deposit options should be available. 

1. Deposit and delivery

  • A deposit reduces monthly payments and interest charges. Low or no-deposit options may be available.

2. Monthly payments

  • Pay for the remainder of the car with a series of fixed monthly instalments for the duration of the contract.

3. You own the car

  • Once you've made the final payment, you become the legal owner and can keep or sell the car as you please.

   

Used car Hire Purchase (HP)

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 and you'll pay less interest overall than with an equivalent PCP deal. As you own the car at the end of the contract, you are free to keep it, sell it or trade it in for another car.

Monthly instalments are higher than other types of finance such as Personal Contract Purchase (PCP) as you automatically own the car at the end of the contract. If you want to own the car at the end of a PCP, however, you'll have to make the large optional final payment - and this could amount to half of the car's initial price if not more.

If you wanted to own a car at the end of a PCP contract, therefore, you'd either have to find many thousands of pounds or refinance this amount, increasing the total amount of interest you'll pay.

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. This means there's no need for the finance company to attempt to estimate the car's likely value at the end of the contract - which is harder the older a car gets.

Meanwhile, other types of finance, such as (PCP) require the lender to gauge the car's value at the end of the agreement - as monthly payments cover the difference between the car's initial price and its predicted final value when the contract ends. This can be extremely difficult for vehicles that are more than five years old, increasing the risk for the finance company.

 

What are the best Hire Purchase deals?

There are often discounts and low interest deals available for cars purchased through HP, 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.

Be wary, however, that manufacturers or dealers that offer interest-free credit will typically not include the same discounts as those that charge interest, so the cash price is likely to be higher. Therefore, interest-free credit is no guarantee that you're getting a good deal. The best way to compare is to get like-for-like quotes with the same deposit and contract length - these should show which option offers you the best value.

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% APR deal where no interest is charged.

 

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 - such as PCH, or PCP where you hand the car back at the end of the contract - will offer more affordable monthly payments and a simpler process at the end.

You could take out a Personal Contract Hire package, which is a straightforward new car lease. You make a series of monthly payments and then hand the car back at the end. Bear in mind, however, that because you have to return the car you will need to stick to a pre-agreed mileage limit and keep the car in good condition to avoid end-of-contract charges.

A Personal Contract Purchase (PCP) agreement offers a similar setup in that you make an upfront deposit followed by a series of monthly payments and can choose to hand the car back when the contract ends. PCP is available for new and used cars, with the added flexibility of being able to buy the car for a lump sum once you have made your final monthly payment.

Additionally, with PCP if the vehicle is worth more than that lump sum, then you'll have a third option of 'trading in' the car and using any value in the car over the remaining finance balance to put towards the deposit on your next car, reducing your monthly payments at this stage.

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 and if you do want to buy the car with PCP you'll end up paying more interest - assuming the same APR charge - as interest mounts quicker as you're paying off the balance slower due to the lower monthly payments.

Meanwhile, PCP and PCH options mean 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 as you have to hand a car on PCH back and can choose to do so with PCP when you get to the end of the contract.

 

   

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, all split across a deposit, followed by a series of even monthly payments.

Therefore, if you put down a £1,000 deposit on a £10,000 car, that would leave you with £9,000 to pay split evenly across the monthly payments. If you went for a three-year contract, that'd be £250 a month plus interest.

Some companies offer what is called a deposit contribution - typically on PCP and Hire Purchase deals - where the seller pays something towards your deposit. This is effectively a discount and reduces the amount you have to pay. Low interest, or even 0% interest deals are also available on some cars.

Do bear in mind that some cars may have a large deposit contribution discount but high APR - meaning high interest charges - while others may not provide a deposit contribution but offer far lower interest charges and could cost you less. When comparing finance deals, make sure to compare like-for-like contract terms - the same deposit and contract length in the case of Hire Purchase - so you can be certain you're getting the best deal.

 

Do I own the car?

As long as you make all of the monthly payments with Hire Purchase, 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.


This differs from PCP finance, as with PCP you don't own the car even if you have made all the monthly payments - you have to pay the substantial optional final payment to own it.

As a result, if you want to own the car at the end of the contract and think that PCP offers lower monthly payments than Hire Purchase and so must be the cheaper option, that's not the case (provided the interest charges and discounts are the same), as you have to include the cost of the optional final payment when comparing the two. Remember, also that interest charges amount faster with PCP, so it's likely to cost you more overall.

 

Can I cancel an Hire Purchase contract?

You can walk away early and hand the vehicle back with Hire Purchase but you’ll be left with no car to show for your payments. Depending on the value of the car at the time, and the amount that you have repaid, you may need to make an additional payment, as for much of the contract - especially at the start - the car is worth less than the remaining debt.

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. Half in this case means half of the total amount payable - including the deposit and all of the monthly payments.

If you haven't yet got that far, then you can activate the Voluntary Termination by paying 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 covers the risk that you're left with no car and finance payments still owed, should the car be written off.

GAP insurance may be useful for Hire Purchase agreements where you put down no deposit - 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 insurance payout and the amount that you owe the 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, meaning that there is only a small gap to cover, or no gap at all.

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 with Hire Purchase, which would make GAP insurance unnecessary.

GAP insurance is more important with PCP finance than Hire Purchase because you're paying off the finance balance more slowly due the large optional final payment.

     

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