What is hire purchase?
Hire Purchase (HP) is a type of car finance that allows you to pay for a new or used vehicle in instalments. Whilst paying off the car loan, you 'hire' the vehicle, but once the final payment is made, you'll become the legal owner.
How does hire purchase car finance work?
To start using the vehicle, you'll need to put down a deposit - typically around 10%. The greater the deposit you put down, the lower your monthly payments will be.
Like a car loan, you'll make monthly payments for an agreed term – typically between two to five years. You don’t have any ownership rights during this time and will be effectively renting the car.
Once you've paid off the loan, you'll become the car's legal owner at the end of the agreement. This transfer of ownership sometimes incurs an additional admin fee called an ‘Option to Purchase’ fee.
How much does hire purchase finance cost?
This depends on several factors - the greatest being the vehicle’s cost and whether you're financing a new or used car.
Other factors include:
- Deposit - the more cash you pay upfront, the smaller the loan
- Interest rate - a low APR will reduce the total loan cost
- Loan term - a short loan could increase monthly payments, but you won't pay as much interest
- Option to Purchase fees - some dealerships may charge a transfer of ownership fee
Car finance can be competitive for new cars because independent and franchised car dealerships want your custom. You may find HP car finance deals as low as 0% APR for a new car with a car dealership.
Annual percentage rates tend to be higher for used cars or if you apply for your hire purchase deal online.
Who owns the car on hire purchase?
For the duration of the hire purchase finance contract, the finance company owns the car. The lender will pay the car dealership for the vehicle on your behalf, and you will pay the money back to the finance company.
The car is used as security against the loan by the finance company, so if you cannot repay the loan, the finance company can seize the car.
The car dealer will often get a commission from the car finance lender deal - which is how they can offer such competitive finance rates.
What happens at the end of a hire purchase agreement?
For the duration of the loan period, you'll pay back what you owe in monthly instalments whilst you rent the car. At the end of the HP contract, you have the option to buy it.
Unlike with a personal contract purchase (PCP) deal, where you can choose to trade in your hired car for another model or make a balloon payment (a large final payment) to own the vehicle - with an HP agreement, you simply pay a fee to complete the transfer of ownership.
What's the difference between a hire purchase and a personal contract purchase?
Personal Contract Purchase (PCP) is similar to hire purchase in that it's a type of car finance that allows you to buy a car on loan and spread the cost of repayments after an initial deposit is put down.
However, with PCP finance, you get more options at the end of the contract; for example, you can either:
- Trade in your car and start a new PCP contract
- Pay the balloon payment and keep the car
- Return the car to the dealer
PCP monthly payments are often lower than other hire purchase instalments, but if you decide to keep the car at the end of the term, you'll need to make a significant final payment known as a balloon payment.
In comparison, the final payment with a hire purchase agreement is often no greater than your other instalments, and the only extra is an ‘Option to Purchase’ fee.
Whether you choose a hire purchase deal or a personal contract purchase depends on your financial circumstances and how often you wish to change your car.
What are the pros and cons of hire purchase?
To help you decide if HP car finance is right for you, here are some of the main pros and cons:
- Low deposit required, typically 10% of the vehicle price
- Fixed interest rates and monthly payments to help you budget
- You can choose the borrowing period (usually between two and five years)
- If you have a poor credit score, it could be easier to get approved for a hire purchase than a car loan
- Unlike with a PCP deal, you won't need a large sum at the end of your contract to become the legal owner of the vehicle
- Car dealerships may offer competitive rates or deposit discounts when you purchase the car
- You don't own the car until you've made your final payment, which means if you get into financial difficulties, the finance company could take it away
- You can't sell or modify the car over the contract term without getting permission first
- Monthly payments are usually higher than for PCP and leasing deals
- It can work out more costly than other options if you only want a short-term agreement
Is hire purchase a good idea?
There are advantages and disadvantages to all car finance options. Ultimately it depends on which type of car finance suits your financial situation and preferences.
Hire purchase may seem the easiest option, but weighing the pros and cons and taking time to understand the overall costs of hire purchase is essential. Read the terms and conditions carefully before you sign any agreement, and check for any restrictions or fees.
Remember, the finance company is entitled to seize the vehicle if you fail to keep up payments.
What are the alternatives to hire purchase?
Here are some other ways to purchase car, drive it away and spread the costs over time:
Personal car loan
An unsecured personal loan is one of the simplest car finance options. The interest rate is fixed, and repayments are made monthly over a set period between one and seven years. It's up to you to choose the term, but the longer you take to repay what you borrow, the more interest you'll pay.
A personal car loan is ideal if you have a good credit score and regular income. Personal car loans are widely available online, so they can be the best car finance option if you want to own your car immediately with minimum hassle legally.
Leasing, also known as 'personal contract hire', is a cost-effective option if you're happy to hire a car rather than own one or only need one for a short time.
Like other car finance options, you'll pay a deposit upfront and make monthly payments. Upfront costs for lease vs hire purchase are usually more expensive because you may have to pay up to three months' rental in advance and a large deposit to cover the cost of wear and tear.
This option is worth considering if you only intend to use your credit card for part payment of your new vehicle and use a 0% interest purchase card. You'll need to pay off the balance within the interest-free period; otherwise, interest rates will be higher than other car finance options once the 0% APR introductory period ends.
Hire Purchase FAQs
If you plan to apply for a hire purchase agreement, a hard credit check will need to be performed, leaving a record on your credit report.
More than one hard credit check in six months may damage your credit score, making it more challenging to get approved for credit. It’s important to check your credit report for any previous applications or missed payments before applying for any car finance and take steps to improve it if you spot any problems.
Once a car finance agreement is in place, as long as payments are made in full and on time, your credit rating won't be affected and keeping up payments could help to improve it.
Yes, it's possible, but getting accepted for the best hire purchase finance will take more work. You may have to pay a larger deposit than the usual 10%, and the interest rate offered by the finance company may be higher.
Hire purchase finance can sometimes be easier to get than other car finance because the loan is secured against the car.
If you need help getting a hire purchase deal through a car dealer, consider using a comparison site that matches you to a lender specialising in bad credit.
You can't sell the car until you have made all the loan payments and paid the ‘Option to Purchase’ fee. This is because the finance company owns the vehicle until a transfer of ownership occurs.
If you want to get rid of the car or can no longer afford it, you can request 'voluntary termination', which allows you to get out of the agreement early, provided you've repaid at least half the loan amount.
Yes, it's possible, but the finance company will typically require you to have paid back at least 50% of the total loan amount, including interest, before you can voluntarily terminate the HP agreement.
Unlike PCP finance, a hire purchase doesn't have a ‘balloon’ payment, so you'll own the car outright once you’ve made the final payment. This means you’ll reach the 50% payment date halfway through your finance term.
At this point, you can either request a settlement figure to pay the remainder as a lump sum or return the car to the finance company.