How does hire purchase work?
HP deals on cars are available at the dealership, via some banks and building societies, or from online brokers (like us) or lenders. No-deposit options are available through us, but many borrowers choose to pay a deposit of around 10% of the car’s full value, as this is likely to reduce the regular payment amounts required – and the overall interest payable. You’ll then need to pay off the remaining loan in fixed monthly instalments over an agreed length of time.
As the loan is secured against the car, you won’t own the vehicle for the duration of the loan term, but you will be its registered keeper. That means you’ll be responsible for the car’s general upkeep, insurance costs, and any parking or speeding tickets you may receive.
If you struggle to keep up with your repayments and fall behind, the lender may seize the vehicle. However, if you do finish making all your instalments, you’ll own the car. Keep in mind that you’ll likely be asked to pay a small administration charge – known as the Option to Purchase fee – before taking ownership. This fee is usually between £100 and £200 but varies between lenders.
How to get the best hire purchase deal for your circumstances
If you think that HP car finance might be the right option for you, it’s understandable that you’d want to find the best deal for your circumstances. When weighing up your options, it’s worth considering a range of factors, such as the APR offered, the total amount repayable, the total cost of credit, and any additional fees included in the contract.
There are several ways that you might be able to secure a cheaper car finance loan:
Put down a larger deposit
The more money you can put down upfront, the less you’ll have to borrow from the lender. This could mean you have lower monthly repayments or can opt for a shorter loan term and pay less interest overall.
Choose a cheaper car
Buying an older car or entry-level vehicle can also reduce the amount you need to borrow.
Agree to a longer loan term
An increased term will allow you to split the total loan amount into smaller monthly repayments. However, if you choose this option, it’s worth bearing in mind that you are likely to end up paying more interest overall.
Improve your credit score
While it’s not the only factor that lenders consider when offering a hire purchase loan, a strong credit score can reassure them that you’ll be a reliable borrower, and so you could qualify for more competitive rates.
What do I need to be eligible for hire purchase car finance?
When buying a car on finance, you’ll typically need to pass a hard credit check and an affordability check to demonstrate that you can keep up with your monthly repayments over the full term of the loan. Car finance in the UK is also only available to people aged over 18.
To be eligible for HP car finance, you’ll need to provide certain details. The exact requirements can differ depending on the lender that approves your application, but will likely include:
- Your name and date of birth
- Proof of address and three years’ address history in the UK
- Your employment details, including current job title and salary
- Your bank details and proof of income, such as three months of payslips or bank statements
- A full or provisional UK driving licence
- Proof of ID, such as a passport
What are the advantages and disadvantages of hire purchase?
HP car finance might be the best choice for you and your circumstances, but it’s not right for everyone.
Here are some of the pros and cons of hire purchase agreements:
- You’ll own the car once you reach the end of your agreement – if you’ve paid the balance in full
- You won’t usually have to agree to any mileage restrictions
- Depending on your circumstances, no deposit options are available
- The interest rate will be fixed throughout the loan
- There’s no large balloon payment at the end of your loan term
- You won’t own the car until you reach the end of your loan term
- You can’t sell or modify the car during the loan period without permission
- Monthly repayments can be higher than they would be with other types of car finance
Ending a hire purchase contract
When you sign an HP agreement, you commit to making repayments for a period that can typically range from one to five years. Of course, your circumstances may change during this time.
If you need to end your hire purchase agreement early for whatever reason, you can hand possession of the vehicle to your lender at any time. But please be aware that you are liable for 50% of the total amount repayable on your loan, including interest and charges. If you have paid this amount or more already, you can walk away without further penalty, assuming you return the vehicle in a satisfactory condition. This process is known as voluntary termination, a record of which will appear on your credit report but shouldn’t affect your credit score.
If you decide to end the agreement before you’ve paid at least 50% of the balance, you’ll be required to pay the shortfall, and it will negatively affect your credit score. This process is known as voluntary surrender and is usually a last resort if you can’t afford your repayments. The lender will sell your car and use the proceeds towards your loan. If there is any remaining balance after the sale, you will still be liable to pay this.
Paying off your car finance early
If you want to buy the vehicle early, you can contact the lender to request a settlement figure. Depending on your situation, you might be able to pay this figure outright, or look to secure a refinancing loan to split the cost into more affordable repayments over a longer loan term. Bear in mind that early repayment charges may apply if you clear your balance early.
Other car finance options
Buying a car on HP car finance isn’t the only option. There are several other types of car loan available that might be better suited to your circumstances:
PCP (personal contract purchase) is similar to hire purchase as it’s also a loan that’s secured against the car, but it gives you more options at the end of your agreement. You won’t automatically own the vehicle; instead, you can choose to hand it back to the lender with nothing else to pay, buy it by paying the one-off balloon payment, or use any equity as a deposit for a new car.
PCH (personal contract hire) or car leasing is a form of long-term car rental that is often only available on new cars. You’ll have to make monthly payments, agree to a set mileage, and keep the car in good condition; but when you reach the end of your agreement, you can simply hand the car back. There’s no option to buy the car or part exchange it for a new one.
A personal loan is an unsecured loan that you can use to buy a car. You’ll make monthly repayments, but as soon as you’ve used the loan to purchase the car, it’ll be all yours. This means you can do whatever you like with the car, including modifying or selling it.
What is conditional sale?
When researching car finance options online, you might come across hire purchase being described as a conditional sale; however, this type of loan does work slightly differently. With a conditional sale, you’ll automatically own the car as soon as you’ve finished making all your repayments, typically without an Option to Purchase fee.
Should I lease or buy a car on hire purchase?
Weighing up hire purchase vs leasing? As with choosing any financial product, it’s sensible to explore your options to see which best suits your individual needs and circumstances.
Get Car Finance up to £100,000
- Check your eligibility without impacting your credit score
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- Rates from 9.9%* APR
*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.