How does hire purchase work?
Initially, hire purchase (HP) is similar to hiring a car. You pay a deposit followed by an agreed monthly amount for full access to the vehicle. The difference with HP is that the monthly payments contribute to your eventual purchase of the car, not just the use of it. As a result, HP payments are usually higher compared to a car lease.
You can enter into a HP contract directly with the car dealership or with a broker. While the rates may be different depending on which option you choose, the process is the same. First, you’ll pay a deposit, which is usually a minimum of 10% of the cars’ value at the time of the contract. Then you’ll repay the full value of the car, plus interest, in monthly instalments over an agreed period of one to five years.
Typically, the interest (included in the total cost of borrowing known as APR) is between 4 – 8%, but it can vary depending on your credit score. The higher your score the more likely you’ll be offered competitive rates.
Once you’ve made the final repayment, you’ll have to pay an additional fee known as the ‘option to purchase’ fee. This covers the administration costs involved in transferring ownership of the car to you, making you the legal owner. Until this point, the car remains the property of the car finance provider.
What are the benefits of hire purchase car finance?
If you don’t have a lump sum to buy a car outright, HP car finance can be a good alternative as it allows you to spread the cost over time. As well as this, HP offers:
- no mileage restrictions, or limitations on modifications
- fairly low deposits, usually starting from 10% of the car’s current value
- fixed interest rates for the duration of the contract
- flexible repayment schedules, so you can choose what suits your budget
- no large ‘balloon payment’ required at the end of the contract - unlike personal contract purchase (PCP)
Is a hire purchase right for me?
HP contracts can be a good option if you don’t have the money to buy a car outright, and you know you can afford monthly repayments. The flexibility of being able to choose your contract length allows you to create the most manageable repayment schedule for you.
HP can also be a good option if your credit score is low, as you’re more likely to be approved for a HP contract than some other types of finance.
This is due to your car being used as collateral, which lowers the risk from the lender’s perspective. However, if you fall behind on your repayments, the lender could claim the car back – usually as a last resort. And your credit score will be affected.
Hire purchase vs. PCP
HP and PCP are two of the main options for car finance. PCP is similar to HP in that it requires an initial deposit followed by monthly payments, but there are a few differences.
The biggest difference being that, unlike HP, you don’t automatically own the car at the end of a PCP contract. This is because PCP monthly payments only cover the difference between the car’s initial price and its expected value at the end of the contract term. As a result, the monthly repayments tend to be lower than those for a HP contract.
If you’d like to buy the car at the end of the PCP contract, you’d have to make what’s known as a ‘balloon payment’. This makes up the difference to equal the full value of the car at the time your contract ends.
One alternative to HP or PCP is to get a personal loan to purchase a car. Using a personal loan means that you own the car from the beginning and can spread the cost over one to seven years. However, it can be difficult to get a personal loan if your credit score is low. So, it’s best to use eligibility checkers to find out the likelihood of acceptance before you apply. That way, you can apply with confidence.
What can I expect to pay with a hire purchase?
How much you’ll pay for your HP contract will depend on three main factors, the:
- cost of the car
- deposit amount
- length of the contract
The initial deposit is usually 10% of the car’s value, though you can opt to pay a higher deposit which will reduce your monthly repayments. The length of your contract will also impact the amount of your monthly payments. While increasing the length of the term may reduce the monthly repayments, it will increase the amount of interest you pay overall.
The final ‘option to purchase’ fee is generally between £100 – £200, but it can vary. You’d need to speak to your finance provider or check your terms and conditions for the exact amount.
Here’s an example (we’ve rounded up for ease).
If you take out a HP contract for a car worth £15,000, paying the minimum deposit of £1,500, this leaves £13,500 to pay (plus interest). If you pay back the total balance plus interest over several years, then make a final repayment plus the £100 'option to purchase fee', you will become the legal owner of the car.
What happens at the end of my hire purchase contract?
Once you’ve made the final payment (including any additional fees) on your HP contract, you’ll take full ownership of the car. Until that point though, the car remains the property of the finance provider.
Can I end my hire purchase contract early?
There is a way to end your HP contract early, but you will need to have paid off at least 50% of the total finance amount (including any interest) to do so. This is known as ‘voluntary termination’ and is outlined as a consumer right under the Consumer Credit Act 1974.
The car must be in good condition if you hand it back using voluntary termination, otherwise you may have to pay for the repairs.
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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 21.9%, an annual interest rate of 21.9% (Fixed) and a deposit of £0.00, the amount payable would be £172.09 per month, with a total cost of credit of £3,825.54 and a total amount payable of £10,325.54. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.