Hire Purchase Explained

Want to know how to buy a car over a set period of time at low interest rates? Hire Purchase agreements explained here

Oct 24, 2018

Your car is the second-most expensive thing in your life. So it only makes sense that you want to finance it. Taking out car finance these days is as simple as getting a new phone contract. There are several types of finance to consider though.

This article explains Hire Purchase, or HP for short.

Read more about other types of car finance.

Hire Purchase allows you to buy a car outright and spread the cost over fixed monthly instalments. At the end of the contract, the vehicle is yours to do what you want with it. This is also sometimes referred to as Conditional Sale.

Hire Purchase advantages and disadvantages 

Hire Purchase advantages

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

Hire Purchase disadvantages 

Not the lowest monthly payments
Doesn't allow you to regularly upgrade your car
✘ No flexibility at the end
No protection against unexpected value loss

Hire Purchase finance: how it works

Decide a deposit: This varies between contracts, but generally, the larger the deposit the lower the monthly payment. A deposit is not always needed.

Choose a length of term: Choose how long your contract is (typically two to five years). The longer the term, the lower the amount.

Own the car: At the end of the contract the car is yours.

   

    

Used car Hire Purchase

Hire Purchase can be used for buying new and used cars. It’s more commonly used when buying cars that are used, typically between two and five years old, because it makes things easier for the lender and the customer. The cost of the car, plus the interest, is divided into monthly payments. Simple.

Alternative types of car finance, like PCP, are much more complex. These types of finance require the lender to estimate the value of the car at the end of the agreement, which can be much harder for used cars. 

Hire Purchase deals

You’ll often seen Hire Purchase deals and incentives that should help keep your monthly payments low.

A 0% interest deal might be offered if you’re buying a brand-new car. This means that there is no interest to pay, and you simply buy the car for what its list price. These types of deals are few and far between for used cars, but used cars are often found with low interest rates.

 

Leasing V Hire Purchase V Personal Contract Purchase

There are three main types of car finance.

Personal Contract Hire (PCH) This is colloquially known as leasing. This is essentially long term new car hire. This offers fixed monthly payments, and is generally the cheapest. You simply return the car at the end. Read more 

Hire Purchase (HP) As mentioned in the above text, this spreads the cost of a new or used cars in fixed monthly payments. At the end, you own the car.

Personal Contract Purchase (PCP) This is the most flexible. You pay fixed monthly payments, then at the end hand the car back, or buy the car outright with a balloon payment. Read more

If you don’t want to own the car outright at the end of the agreement, then leasing or PCP are the best options. At the end of the contract, you can just give the car back.

PCP does also give you the option of buying at the end, so if you’re unsure about buying the car, PCP does keep your options open.

Leasing and PCP deals offer the lowest monthly payments because they don’t cover the full cost of the car. Leasing also means you don’t have to worry about the car losing more value than expected.

    

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 just 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 terminatio. 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.

Depending on the lender, you can offer to pay off your contract early. If you get the option of doing this, you get the chance to lower your interest rates, plus own the car sooner.

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.

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 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 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, making GAP insurance redundant.

If your car is worth substantially less than when you bought it, 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.

GAP cover is also generally not needed if you have a brand new car. 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.

        

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