Hire purchase explained
What is hire purchase, how does it work and how can I find the right deal for me? We answer this and more in our handy guide.
What is hire purchase?
In the context of buying a car, hire purchase (HP) is a way to pay for the vehicle without forking out its full value at the outset. As a customer, you’ll typically pay a deposit upfront, and then the remainder of the balance, plus any interest, is split over a set period of time.
Once you’ve made your final payment, you’ll then own the car. Make sure not to confuse it with personal contract purchase (PCP) which is another form of car finance.
How does hire purchase work?
When buying a car, you can either sit down with a dealer to work out an HP deal, or apply online through a site such as Confused.com.
As mentioned, you’ll usually need to pay an initial deposit – this is typically around 10% of the full value of the car.
After this, you can drive the car while you pay off the remainder of its value plus interest via monthly installments.
HP contracts tend to be between one to five years.
What’s the difference between hire purchase and a loan?
The main difference is that if you’re taking out a loan the car is yours as soon as you buy it.
You obviously still need to repay the loan, plus any interest. But it’s not secured against the value of the car, meaning the car will be yours from day one.
With HP, on the other hand, the car isn’t actually yours until you’ve made the final payment.
What happens at the end of the finance deal?
Once you’ve made your final monthly payment you’ll own the car.
Some car finance agreements require a one-off final payment too, similar to an admin charge, in order for you to secure the vehicle.
This should be made clear from the outset.
As the owner of the car you’ll then be able to do with it as you please.
What happens if I miss a payment?
If you miss a payment you may be able to come to some sort of agreement with your HP creditor.
For example, you could be allowed to pay off the outstanding amount over a set period time, or even extend the agreement.
However, this is not always the case and, in some circumstances, your car can be repossessed (see below).
So it’s worth checking how missed payments are dealt with before you sign up to any deal.
As a form of credit, it’s also worth knowing that missing an HP payment may also harm your credit profile.
Can my car be repossessed?
If you break the terms of the HP agreement, for example, by missing payments, then your car may be able to be repossessed.
How easily your car can be taken off you can depend on how much of the outstanding balance you’ve paid off.
The Competition and Consumer Protection Commission website has more information on this, which states:
“If you have paid off less than one-third of the hire purchase price, the car finance company can take back the car without taking legal action against you.
“If you have paid more than one-third of the hire purchase price, a lender cannot repossess the car without taking legal action against you.”
Can I cancel an HP agreement before the final payment?
It’s worth knowing that many HP deals allow you to terminate the agreement before the final payment is made.
In fact it’s provided for by law in the Consumer Credit Act 1974, section 99, and should be noted within your contract.
As a result there are some fairly standard circumstances under which you can cancel.
For example, many agreements say that as long as you’ve repaid 50% of the total amount, which includes any interest, you can end the agreement and give the car back.
How do I get the best HP deal?
There’s no one best HP deal as every agreement will suit different people depending on their financial circumstances.
For example, an HP deal taken out over a shorter amount of time will tend to require higher monthly payments than one taken out over a longer period.
What’s more, paying a higher initial deposit tends to lower your monthly payments. Ultimately, it’ll depend on how much a customer can afford to pay back each month.
Saying this, some deals are obviously more competitive than others, so it’s worth comparing finance deals.
Hire purchase pros & cons
To help you work out whether HP is right for you, here’s a list of some of the more common pros and cons.
Repayment terms are often flexible.
Relatively low deposit payments required.
Interest rate is fixed.
You might be able to return the car part-way through the repayment period, depending on how much you’ve paid back.
There’s no final lump sum to pay at the end of the agreement.
The car isn’t yours until you’ve made a final payment.
If you can’t meet payments the finance company could take your car away.
The size of your deposit and length of your repayment term will affect your monthly payments.
You may be limited to buying your car from a particular manufacturer or dealership.
Shorter-term deals can be relatively costly.