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What is a hire purchase agreement?
If you’re considering buying a car through hire purchase, it’s important you know exactly how the agreement works.
Read on to find out.
Wheels for hire
When you buy a car through a hire purchase scheme, it’s similar to renting it. You make a monthly payment to use the vehicle, but, unlike renting, once you get to the end of the agreement you own it.
A new car today can cost well over £10,000. This is a sum that many people will struggle to afford outright, which is why hire purchase agreements can be a useful option.
You pay a deposit on the car you want, usually around 10%, and you then you make a monthly payment until you have paid off the remaining balance plus interest. You can buy both new and used cars through hire purchase agreements, and the contract is usually offered by the dealer you get the car from – although it can also be offered by brokers.
Hire purchase vs leasing
Once you reach the end of a hire purchase agreement, providing you have made all your payments, you will own your car outright. In comparison, if you lease a vehicle the agreement is much more similar to renting.
When you lease a vehicle, you may have to agree to a specific mileage, you won’t be able to modify it in any way and you must aim to return it at the end of the agreement in the same state in which you got it.
Some car leases give you the option of buying the vehicle once the agreement comes to an end, while others don’t. Either way, you could choose to start a new lease with a new car. If you prefer to drive a brand new car, you may prefer leasing over hire purchase.
Pros and cons of hire purchase
Perhaps the main advantage of a hire purchase agreement is that it provides you with an affordable way to get a new car if you can’t afford to pay for it in one go. Your monthly repayments will fit with your budget, and you can stretch them over a longer term to make them cheaper.
However, unlike if you were to pay for the car outright, with a hire purchase agreement you will be charged interest. The longer your hire purchase term, the more interest you’ll pay. Keep this in mind if you’re thinking of stretching your payments out for longer to make them cheaper.
The interest you’re charged for your hire purchase shouldn’t change, like it would if you were on a tracker mortgage, for example. The interest is fixed, which should make budgeting for your repayments straightforward.
Perhaps the biggest risk to be aware of when you enter a hire purchase agreement is that if you stop making your payments, the vehicle can be repossessed. Hire purchase is rather like a mortgage in that respect; the loan is secured against your car and, technically, you are simply hiring it from the lender until you get to the end of the term.
Know the risks
As with any form of credit, a hire purchase provider will take a look at your credit history when you apply. The better your credit history, the better the interest rate you should be eligible for.
And of course, as with any credit agreement, if you miss your payments or stop making them, this will show up on your credit history. This could make borrowing difficult in the future, not to mention that you’ll be putting your car at risk of repossession. In fact, until you’ve paid a third of the balance of the car plus interest, your lender doesn’t even need to get a court order to take the vehicle from you if you stop paying.
So there you have it! Everything you need to know about hire purchase agreements. Oh, one more thing: hire purchase isn’t limited to cars. You can also buy items like furniture and white goods in this way.