Hire Purchase Explained

Want to own your car for the lowest overall cost with reasonably low monthly payments? Hire Purchase could be the answer

BuyaCar team
May 30, 2020

Breaking the unachievable into small chunks can make it possible, whether you're renovating a house or packing for a family holiday. That's the theory behind Hire Purchase finance, where the full cost of a car - minus any deposit - is split into equal monthly instalments.

Once you've made the final payment, the car is yours to keep, so it's an ideal option if you're looking to own a vehicle long-term. Since you own the car once all the payments have been made, however, you're still free to sell or trade it in at the end of the contract.

Hire Purchase is available for new or used cars. It's flexible, so you can adjust the length of the contract - typically between two and five years - as well as the deposit. The larger the deposit, the lower your monthly payments and the less interest you'll pay, as you're borrowing less. You'll often find that a no-deposit option is available.

Lenders charge interest, which is added on to the monthly payment, and rates are competitive. If you want a brand new car, then there are several 0% APR finance deals available, so you'll only repay the cost of the vehicle and no interest in these cases. Do bear in mind, though, that opting for a new car is still an expensive option - yes, you may be paying no interest, but the amount you're borrowing is likely to be many thousands more than for an equivalent one-, two- or three-year old equivalent.

Conditional Sale finance works in the same way and is virtually identical. Meanwhile, if you're looking for the lowest monthly payments or want to hand the car back at the end of the contract and take out another finance deal,then you may find that other options, including Personal Contract Purchase (PCP) or leasing are more suitable. Read on for more details.

Hire Purchase advantages and disadvantages

Hire Purchase advantages

✔  Spreads the cost of a car
✔  No mileage limits or charges for damage
✔  No deposit option
✔  Available for older vehicles

Hire Purchase disadvantages 

Other options provide lower monthly payments
Less suitable for regularly upgrading cars
✘ No flexibility at the end
No protection against unexpected value loss

 

How HP finance works

1. Deposit & delivery

  • A deposit reduces the amount owed & 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.

Hire Purchase alternatives

There are two main alternatives to Hire Purchase and Conditional Sale finance. Both offer lower payments because you're not repaying the full cost of the vehicle, meaning that you don't automatically become the owner at the end of the term. 

Personal Contract Hire (PCH)
Otherwise known as leasing, this is long term car hire for new vehicles. PCH offers fixed monthly payments, which are generally much lower than HP and a little lower than PCP (see below). You simply return the car at the end, with no option to buy it. Read more 

Personal Contract Purchase (PCP)
This is an extremely flexible arrangement, thanks to the way it is calculated. Your monthly payments cover the difference between the car's price at the start of the agreement and its estimated future value at the end - in other words, the value that the car is expected to lose during that period. 

At the end, you can return the car or buy it for the remaining amount - known as the balloon payment. You may find that the car is worth more than the balloon payment. If this is the case, you'll be able to trade it in or sell it with the agreement of your lender. This will pay off the finance, leaving the difference to be returned to you or put towards another car. Read more

 

Used car Hire Purchase

Hire Purchase only accounts for one in ten new car finance agreements, partly because the monthly payments are much higher than with car leasing or PCP.

However, it's much more common on the used car market where prices - and monthly finance prices are lower - and where many buyers are looking for a long-term car.

HP is also one of the few finance options if you're buying a vehicle that's over five years old. At this age, it becomes more difficult to estimate their future value, which is a key factor in calculating PCP repayments. As a result lenders generally don't offer PCP finance for cars that are over five years old. 

   

Hire Purchase deals

Whether you're buying new or used, Hire Purchase finance is regularly available with incentives and deals that can save you money or make an agreement more affordable. Here are the most common:

  • 0% APR HP finance With no interest charged, you won't pay any more than the price of the vehicle. However you may miss out on incentives that are included with other offers - that do charge interest - so compare quotes to ensure you;re getting the best deal. Generally only available for new cars
  • HP Finance incentives A contribution from the car manufacturer or retailer towards the deposit is effectively a discount on the car and will reduce your monthly payments. Available for new or used models
  • No-deposit HP finance Most new and used cars are available with a no-deposit option, depending on your credit profile. But your monthly instalments will be lower if you put down an initial payment - and you'll pay less interest too.

   

How are Hire Purchase payments calculated?

Over the course of the agreement you pay the full cost of the car, plus any interest. For example, if you buy a £10,000 car, and put a £1,000 deposit, that leaves you with £9,000 to pay over an agreed set of months, plus, whatever interest the lender charges.

 

How to cancel a Hire Purchase contract?

Cancelling a Hire Purchase contract should only be done as an extreme measure. You can leave the contract early, but you won’t own the car. Depending on when you leave the contract, you may need to make additional payments to get out of it.

But if you need to, it’s worth reading up on the 1974 Consumer Credit Act. This act outlays an option called voluntary termination. This allows you to give the car back without any additional costs, once you have made half of your payments. In this situation, if you haven't got to the halfway mark yet, then you can activate the voluntary termination by settling with a lump sum that takes your total repayments to halfway. This leaves you with no car.

You are able to pay the contract off early, which should reduce the total amount of interest that you pay.

 

Should I get Hire Purchase Gap insurance?

Gap (Guaranteed Asset Protection) insurance reduces the risk that you’re left with no car and finance payments still to pay each month after a big crash that wrote the car off.

Gap insurance may be useful in a Hire Purchase situation if you put down a small, or no deposit, on a fairly new car. In these cases, the value of the car can initially drop quickly - much faster than your repayments initially pay the balance off.

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 - unless the car is less than a year old, or potentially two years old in some cases, in which case the insurer is likely to replace your car with a new one, should the worst happen.

If you’re buying a used car with a deposit of 10% or more (generally), then your car may never be worth less than the amount you owe, potentially making Gap insurance redundant with Hire Purchase.

If your financing a car with no deposit or on a very long contract, however, it may be worth substantially less than the remaining finance balance for a reasonable proportion of the contract. If that's the case you may want to take out Gap insurance.

If the car is on a PCP finance contract, however, where you're paying off the finance balance much more slowly - as the monthly payments are lower - Gap insurance gives you greater protection, as there's more chance any insurance payout would fall short of the remaining amount owed.

        

 

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