What is Hire Purchase? (HP)
Find out how Hire Purchase car finance works
Hire Purchase: Sometimes known as HP, is a form of car finance that is used to pay for a car over a set period of time until you have paid off the full value of the vehicle. Unlike Personal Contract Purchase, Hire Purchase consists of a deposit and then monthly repayments with no final optional payment or balloon payment. You pay what you have borrowed plus interest and keep repaying the lender until you have paid off the full value of the car.
Although not as common as PCP, Hire Purchase is a simple way to pay for a new car as there are usually just two steps to take until you fully own the car: the initial deposit and then the monthly payments. With no final optional payment to worry about you keep on paying over a set period of time until you no longer owe anything on the car. The APR representative annual percentage rate is fixed for the duration of the agreement meaning your monthly payments will remain the same no matter what happens to the market. This is great for budgeting.
You will not own the car until the final payment is made and because there is no final optional payment, the monthly payments can be higher than they would with a PCP deal. That said, there is no maximum deposit required, so if you have plenty of cash to put forward you could end up borrowing a very small amount.
How does Hire Purchase car finance work?
Hire Purchase offers flexibility in the amount you borrow and an easy way to budget. You pay as much deposit as you like upfront, usually a minimum of 10% and the rest of the car’s equity plus interest you pay monthly over a set number of months. The loan is secured against the car so you won’t be forced into bankruptcy if you can’t afford the payments and there is usually an opportunity to settle the agreement early if you need to.
Most Hire Purchase deals require you to pay at least 10% of the car’s value up front. Unlike PCP however you can pay as much deposit as you like so you could end up with very low monthly payments if you only need to borrow a small percentage of the car’s value.
- Monthly payments
You then pay what you have borrowed over a set number of monthly payments from anything between 12 to 48 months. This allows you to budget and with no large balloon payment to worry about at the end of the agreement you simply keep paying until the car is yours.
Should I buy a car on finance?
Like with any finance-based agreement you need to make sure you fully understand what you’re signing up for. You need to know that you are bound by contract as soon as you sign but you won’t actually own the car until you pay that final payment. Some finance companies are flexible and will let you pay off more sooner, sometimes with a fee, but generally you need to make sure you can afford all the monthly payments for the duration of the contract.
When buying a car on finance it is tempting to get something flashy because the monthly payments look so attractive, but just make sure the car will still suit your needs when you come to the end of the contract. Will it be big enough? Economical enough? Reliable enough? The last thing you want is to be paying for a car that spends most of the time in the workshop because it’s not been reliable or paying for a car you find difficult to use because it’s not big enough.
Before you sign on the dotted line ask yourself:
- Can I afford the monthly payments now and towards the end of the contract?
- Will I still be able to afford the payments around Christmas?
- Am I ok with not owning the car until I have paid the whole value off?
- Is Hire Purchase the right option or should I consider PCP?
- Is the length of the contract realistic? Am I still going to want the same car in two, three or four years time?
Remember your insurance
A lot of Hire Purchase agreements will require you to have fully comprehensive car insurance, so be sure to factor in the cost and get quotes before you buy the car. Also you’ll need to make sure the Hire Purchase agreement and the insurance are all in your name, that way if the car is written off it is easier for the finance company to recover the money they are owed. Remember however that you will still owe the difference between what the insurance company pays out and what the car is worth, so if your insurance company pays you £10,000 but your agreement is for £12,000 then you will need to pay the difference.
Be sure to check out: What is GAP Insurance?
Remember to read the agreement fully. Most Hire Purchase agreements tend to have a much higher APR than a PCP deal and so the monthly payments tend to be greater as well. Be sure to look at the ‘total amount payable’ as this will say just how much interest you’ll be paying on top of the value of the car.
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Disclaimer: This page is intended to provide information only, it is not, and should not be taken to be advice or an offer of credit. The information is subject to change without notice. Every effort has been made to ensure the accuracy of the information on this page and manufacturers or dealerships may vary the products or specifications of the products they offer. For full terms and conditions contact the relevant manufacturer or your local dealer. Imagery is a visual representation and may not represent the exact products. Please ensure you can afford the monthly payments before signing any contractual agreement. You will not own the vehicle until all payments have been made. Any finance or offers mentioned are not available in conjunction with any other offer and may be varied or withdrawn by the manufacturer or dealer at any time.