HP Explained

Low deposit + low monthly payments seem too good to be true? We explain HP

Oct 24, 2018

Going to the bank and getting a loan for your car seems a bit old hat these days. Thanks to car finance, getting a new car is pretty much as simple as getting a new phone. But remember, there are several types of finance to consider, and figuring out the best to suit your situation can save you some serious dough.

HP, or Hire Purchase, lets you buy a car outright and spread the cost over monthly instalments. At the end of these payments, you own the car outright. You may also see this referred to as Conditional Sale.

Read more about other types of car finance.

HP advantages and disadvantages 

HP advantages

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

HP disadvantages 

Monthly payments higher in comparison to other types of finance
Doesn't allow you to regularly upgrade your car
✘ You have to buy a car outright
No protection against unexpected value loss

HP finance: how it works

Choose (or don't choose) a deposit: Generally, the larger the deposit the lower the monthly payment. A deposit is not always needed.

Pick a length of contract: Remember, the longer the term, the lower the amount.

Own the car: After paying off your monthly instalments, the car is yours to keep.



Used car HP

HP is more commonly used cars, typically between two and five years old. This is 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.

Other types of car finance, like PCP, are much more complex. These require the lender to estimate the value of the car at the end of the agreement. This is much harder to calculate for used cars. 

HP deals

HP deals and incentives help keep your monthly repayments low.

One of the most popular ways of getting people into a HP deal is by offering 0% interest. These are generally only offered if you’re buying a brand-new car though. These deals are straightforward enough - essentially 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 HP V Personal Contract Purchase

There are three main types of car finance.

Personal Contract Hire (PCH) You may see this written as leasing. In essence, this is long term new car hire. It offers fixed monthly payments, and is generally the cheapest way of getting a new car on your driveway. At the end of the agreement, you simply hand the car back. Read more 

Hire Purchase (HP) This spreads the cost of a new or used car in fixed monthly payments. At the end, you own the car.

Personal Contract Purchase (PCP) This allows you to pay fixed monthly instalments. At the end of the agreement, you hand the car back, or buy the car outright with a balloon payment. Read more

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

PCP is best for flexibility, as it gives you the option of buying at the end.

Leasing and PCP are often the cheapest per month deals. This is because they don’t cover the full cost of the car.


How are HP payments calculated?

You pay the full cost of the car, plus any interest, over the course of an agreed amount of time.

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 HP contract?

This should only be considered in extreme circumstances. You can legally leave a HP contract early, but you won’t own the car. Depending on when you leave the contract, you may also need to make additional payments just to get out of it.

If you do need to leave a contract, it’s worth researching the 1974 Consumer Credit Act. This act outlays an option called voluntary termination, which 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 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 HP 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 the rate of your repayments.

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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