If you’re thinking of taking out a car on hire purchase, it’s important you understand the ins and outs of what you’ll be signing up to.
Let’s take a look at the pros and cons of hire purchase and the other options available for financing your dream car.
What’s hire purchase?
If you choose to buy a car on hire purchase, you’ll be asked for a deposit - usually 10% (but this number can change) - and need to agree to paying monthly instalments with interest towards the remaining balance.
It’s not until your final payment clears that you’ll own the car. As the name suggests, in a sense you’ll be hiring the car until you finish paying for it.
While the repayment term can be flexible, bear in mind that the longer you’re making payments for, the more interest you’ll pay on top of the cost of the car.
What other options do I have?
Hire purchase isn’t your only option when buying a car. You could choose to finance your car in a different way. One option is a personal loan. You could apply for this through a mainstream lender or through the car dealership you’re buying your new wheels from (although the latter option can be more expensive).
Alternatively, you could consider leasing a car through a personal contract purchase (PCP) or personal contract hire (PCA). PCP is similar to hire purchase in that you pay monthly instalments. At the end of the agreement, you’ll have the choice of either giving the car back, putting the amount owed to you towards a new car, or making a one-off payment (balloon payment) to purchase the car. With PCA, you give the car back at the end of the contract.
You may even be able to use your credit card to pay for all or some of the car. Of course, this will depend on your credit limit, but it might be a way of spreading the cost.
What about cash?
Have a think about whether you need the latest model or can make do with a ‘run around’. Remember, whatever you borrow, you’ll pay back. Consider your budget and have a think about how much you can realistically afford to pay each month.
If you choose to use your savings, as a ‘cash buyer’ you’ll save money in the long-run as you won’t pay interest. Plus you may even score a discount on the asking price.