HP explained: buy new or used cars in affordable instalments

Low deposit + low monthly payments seem too good to be true? We explain Hire Purchase (HP) deals

BuyaCar team
Jan 11, 2019

Hire Purchase (HP finance) is one of the simplest ways of spreading the cost of a new car over two to four years.

You'll typically pay a deposit, followed by a series of monthly payments. At the end, you'll own the vehicle. This makes monthly payments more expensive than alternatives, such as Personal Contract Purchase (PCP) finance, where there's a lump sum to pay at the end if you want to keep the car.

HP finance is normally flexible: you can adjust the deposit amount (which is often optional), as well as the length of the arrangement to increase or decrease the monthly instalments. Interest is charged in most cases and this is added on to your monthly repayments, although some 0% interest deals are offered on new cars.

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 minor 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

HP finance can be adjusted to suit your circumstances. Changing the deposit and agreement length will increase or decrease your monthly instalments; there's often a no-deposit option.

1. Deposit & delivery

  • A deposit reduces the amount owed and 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.

Used car HP

HP finance 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.

HP 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.

 

HP deals

If you're looking at a new car, then there's a good chance of being offered 0% interest HP finance, 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 by looking at the total amount payable.

Interest-free offers are rarely available for used cars, but low-rate finance can minimise your interest costs.

 

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.
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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. In many cases, you can also trade the car to cover the deposit on a new car.
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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 and the ability to return the car at the end. PCP also brings extra flexibility because you can also pay an additional sum to own the vehicle.

However, if you are planning to own the car for several years, and can afford higher monthly repayments, then HP often works out cheaper in the long run. That's because the higher monthly repayments reduce your debt more quickly, reducing the interest repayments. Take out PCP finance and you'll be paying interest on the sizeable final balloon payment until the very end of the arrangement

 

How are HP payments calculated?

You pay the full cost of the car, plus any interest, over a set term, which is usually between two and four years.

For example, pay a £1,000 deposit for a £10,000 car and you'll repay the remaining £9,000 over a series of fixed monthly payments, in addition to any interest that's added.

 

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 it might not offer particularly good value for money.

Once you have paid half of the total finance amount, then you're eligible for 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 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.

Hire Purchase finance can normally be paid off early. You'll need to ask your lender for a settlement figure and the car will be yours once you pay it. 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 HP 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 this up, either with cash. If affordable, you may be able to take out negative equity finance on your next car.

 

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 it's then written off, your insurance payout may not cover the cost of settling your finance, so you'd risk having to continue making payments for a scrapped car.

GAP insurance would cover that difference and, depending on the type of cover you choose, can even top up your payout to the amount that you 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, making GAP insurance redundant.

New car buyers don't normally need GAP insurance because many comprehensive insurance policies will replace a written-off vehicle with a brand new car in the first year.

 

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