Hire Purchase (HP) explained: buy new or used cars with affordable instalments

Want to own your next car and cut the amount of interest you're charged? Check out Hire Purchase - available on new and used cars

BuyaCar team
May 30, 2020

Hire Purchase is one of the simplest ways of spreading the cost of a new car - typically over two to five years - and owning it once you've made the last payment. You'll typically pay a deposit, followed by a series of monthly payments. At the end, you'll own the vehicle.

As your monthly payments cover the whole value of the car, the instalments are higher than with alternatives such as PCP finance - also known as Personal Contract Purchase - as this involves an additional large optional final payment that you must pay at the end of the contract if you want to keep the car.

Hire Purchase is normally flexible: that means you can adjust the deposit amount - the higher this is, the lower your monthly payments - as well as the length of the contract - with shorter contracts reducing the amount of interest you pay and longer ones reducing your monthly payments. Interest is typically charged and included in your monthly repayments, although some 0% interest deals are offered on new cars.

Do bear in mind, though, that purchasing a new car with 0% APR is still normally more expensive than buying a nearly-new or used equivalent, as even though you may not be paying interest, you're borrowing a much larger amount in the first place. Hire Purchase-type arrangements are also known as Conditional Sale.

 

HP advantages and disadvantages 

HP advantages

✔  Simple way to purchase a car outright
✔  No mileage limits or charges for damage
✔  Can include £0 deposit
✔  Available for older vehicles

HP disadvantages 

Monthly payments higher than other options
Doesn't allow you to regularly upgrade your car
✘ You only own the car after the final payment
No protection against unexpected value loss

HP finance: how it works

Hire Purchase can be adjusted to suit your circumstances. Changing the deposit and contract length will increase or decrease your monthly instalments and there's often a no-deposit option.

The larger the deposit you put down, the lower your monthly payments and the less interest you pay overall, while going for a longer contract means lower monthly payments, but also increases the overall amount of interest you pay, as you're borrowing money over a longer period.

1. Deposit & delivery

  • A deposit reduces the amount owed. A no-deposit option may be available

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.

Used car Hire Purchase (HP)

Hire Purchase works in exactly the same way for new and used cars. Almost every car can be bought with this type of arrangement.

It's well-suited to anyone looking to keep their car for several years, because you'll automatically end up as the owner once you've made the final payment.

The finance is secured on the car, which means that the finance company owns the car until you've made the final payment.

Hire Purchase is particularly popular for cars that are more than five years old because of its simplicity. Other types of finance, such as PCP, are based on the car's value at the end of the agreement, which is difficult to calculate for older vehicles. As a result, the older a car is, the less likely you are to be able to get PCP finance on it.

 

Hire Purchase (HP) deals

If you're looking at a new car, then there's a reasonable chance of being offered 0% APR Hire Purchase, so there's no interest to pay on top of your repayments. Taking up a 0% interest offer may mean that you're not eligible for other discounts, so it's worth comparing deals - as interest-free credit deals can sometimes cost more than alternative deals that include large discounts.

Interest-free offers are rarely available for used cars - and where they are available, the price of the car may be increased, to cover the loss of interest - but low-rate finance can minimise your interest costs.

For the best value deal, it's always worth getting like-for-like finance quotes - with the same type of finance, deposit amount, contract length and mileage allowance (with PCP finance and lease deals) - to see which option is most affordable.

This should allow you to compare the cost of a 0% APR deal on a new car with a high cash price, for instance, vs a two-year old equivalent that could be £10,000 cheaper but be available with 6.9% APR. Get a like-for-like quote and you'll easily be able to gauge how the monthly payments compare.

 

Leasing vs HP vs PCP

There are three main types of car finance.

Leasing

Leasing, or Personal Contract Hire, is a long-term car rental agreement that's offered for new cars. It brings fixed monthly payments, and is generally the cheapest way of getting a brand new car on your driveway. At the end of the agreement, you simply hand the car back, though there's no choice to buy it, if you've fallen in love with it.

Read more 

Hire Purchase (HP) 

This spreads the cost of a new or used car across fixed monthly payments. At the end, you automatically own the car and you are free to keep it, trade it in or sell it on.

Personal Contract Purchase (PCP) 

This allows you to pay fixed monthly payments. At the end of the agreement, you can hand the car back, or buy the car outright by making the pre-agreed optional final payment to take ownership. In many cases, you can also trade the car in - effectively the place you're buying your next car pays off the remaining finance balance on the car to the finance company and any extra you can put towards the deposit on your next car, reducing your monthly payments.

Read more

If you don’t want to own a car outright at the end of an agreement, then leasing or PCP arrangements offer lower monthly payments than Hire Purchase and the ability to return the car at the end. PCP also brings extra flexibility because you can make the optional final payment to own the car if you decide you want to.

However, if you are planning to own the car for several years, and can afford slightly higher monthly payments, then Hire Purhase should work out cheaper in the long run than an equivalent PCP deal. That's because the higher monthly payments with Hire Purchase reduce your debt more quickly, meaning you pay less interest overall. Take out PCP finance and you'll be paying interest on the sizeable optional final payment until the very end of the arrangement, too.

 

How are HP payments calculated?

You pay the full cost of the car, plus any interest, split across a series of monthly payments normally spread across two and four years.

For example, the cost of a £10,000 car could be spread across a £1,000 deposit, with the remaining £9,000 - plus interest - spread over a series of fixed monthly payments.

 

How to cancel a HP contract?

If your circumstances change and you want to end your Hire Purchase contract early, then this is possible, although doing this might not offer particularly good value for money.

Once you have paid half of the total amount owed, then you're eligible to use Voluntary Termination (VT). This legal clause in the 1974 Consumer Credit Act allows you to return the car and walk away with nothing more to pay. The downside of this is that you'll have paid for at least half of the cost of a car with nothing to show for it.

If you haven't reached the halfway point, then you can top up your payments to hit that mark and then you can use the option to VT if needed.

Hire Purchase finance can normally be paid off early. You'll need to ask your lender for a settlement figure. Pay this and the car is then yours. If you're in a position to do this, then this will usually reduce the amount of interest that you pay, as you'll be borrowing money for a shorter time

Most car retailers will accept cars with Hire Purchase finance outstanding. They will buy the vehicle, paying the finance company to settle the agreement. Your ability to do this depends on how much your car is worth. If it's less than the settlement fee, then you'll need to make up the difference, either with cash or adding the difference to the finance on your next car - which increases your monthly payments and means you end up paying more interest. This is known as negative equity car finance.

 

Should I get HP Gap insurance?

Gap (Guaranteed Asset Protection) insurance reduces the risk that you’re left with no car and finance payments outstanding after a big crash.

Gap insurance may be useful with Hire Purchase 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 quicker than your monthly payments pay the balance off.

If the car is then written off, your insurance payout - which typically covers the value of the car at the time it's written off - may not cover the cost of settling your finance, so you'd risk having to continue making payments, despite no longer having the car.

Gap insurance, meanwhile, would cover that difference and, depending on the type of cover you choose, can even top up your payout to the amount originally paid for the car.

However, if you're putting down a large deposit, then your car may never be worth less than the amount you owe with Hire Purchase, making Gap insurance redundant.

Furthermore, new car buyers often don't need Gap insurance because many comprehensive insurance policies will replace a written-off vehicle with a brand new car in the first year - or two years with some policies.

 

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