Hire Purchase Explained

If you are looking to own your car at the end of a contract for the lowest overall cost, Hire Purchase could be right for you. Here’s why

BuyaCar team
Mar 5, 2021

Large projects are generally much more manageable when you break them down into small chunks. This is as true for redecorating a house as it is packing for a holiday. And it’s also true when you want to finance a new car. This is essentially how Hire Purchase (HP) finance works. Excluding any deposit you put down up-front, it is simply the total cost of the car split into equal monthly payments.

Although the car belongs to the finance company while you are making the payments for it, once the contract term has come to an end, the car then becomes yours to keep – or sell on as you please. This makes HP an ideal route to take if you plan to keep the vehicle for longer than just the length of the payment contract.

You can get HP deals on new or used cars, and it’s a flexible form of finance, so you can tweak the contract length or deposit amount to suit your needs.

Shorter contract lengths will mean higher monthly payments, for example, but you’ll be paying less interest overall so the total cost of the finance will be less. On the other hand, a larger deposit in the first place could lower your monthly payments and also mean you pay less interest. You'll often find that a no-deposit option is possible, too.

Generally speaking, HP deals are set up to last for between two and five years.

Lenders charge interest, which is added on to the monthly payment, and rates are competitive. If you want a brand new car, then 0% APR finance deals could be an option; 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, and some 0% APR deals miss out on dealer discounts so can end up more expensive as a result. Plus, compared with a used car, the amount you're borrowing is likely to be many thousands more than for an equivalent one-, two- or three-year-old model.

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 down, that leaves you with £9,000 to pay over an agreed set of months, plus any interest 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 deposit – or no deposit at all – 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 you’re 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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