What is H.P. (Hire Purchase)?
A Hire Purchase agreement is a type of car finance that allows you to pay for the vehicle over an extended period through monthly payments. The buyer can choose the length of the repayment period, which is typically between 1-5 years. The longer the repayment period, the smaller the amount you have to pay each month. However, you will pay more interest the longer you have the finance in place. At the end of the agreement, you own the car outright.
H.P. remains a popular option in the UK, with prospective car buyers liking its simplicity compared with other finance options, as well as the fact that it doesn't require a large balloon payment at the end and it culminates in them owning the vehicle once all of the payments are made.
A key potential downside is the fact the loan is, in effect, secured against the car. If you don't keep up with your repayments, the finance company can seize the car.
How does Hire Purchase work?
There are three main components to H.P. finance:
- Deposit: You will typically be expected to put down a minimum of 10% of the car's value as a deposit. If you have a less-than-perfect credit history, you can expect to have to pay a much larger deposit, as well as a higher APR.
- Monthly payments: The repayments are calculated based on the cost of the car minus the deposit you have paid. Interest will be added to this and will vary depending on your credit history and the credit provider.
- Option to purchase fee: At the end of the finance plan you will often need to pay an additional fee to cover the cost of transferring the ownership of the car into your name. This shouldn't be much more than £100-£200, but it is worth checking the exact amount before taking out the agreement.
Hire Purchase payment example
- Car Price: £20,000
- Deposit (including part exchange): £3,000
- APR: 6.2%
- Loan term: 4 years
- Monthly repayment: £399
- Option to purchase fee: £100
- Total cost of finance: £19,152 (plus £3,000 deposit)
What is voluntary termination?
With a Hire Purchase agreement, once you have repaid at least half of what you owe, you have the option to return the car to the finance company and walk away without having to make any further payments. You won't however, have any remaining legal rights over the car. It may be something you'd consider if you can no longer afford to make the repayments, you no longer need the car or you would be better off getting a cheaper finance deal on a different car.
If you want to return the car but haven't paid off half of the debt, you will need to pay the outstanding amount between what you owe and the halfway point.
If you are planning to use voluntary termination, you will have to pay for any repairs that are needed on the vehicle. It is also a good idea to make sure you keep any paperwork relating to returning the car in case you are accused of missing payments or defaulting on the loan in the future.
Where can I get Hire Purchase finance from?
There are two main sources of Hire Purchase finance:
H.P. from a dealership
The most common place to get H.P. finance is direct from the dealership where you buy the car. This will either be from a franchised dealership linked to a particular manufacturer, from an independent dealership or from a large car supermarket. It is worth noting the finance deals can vary between dealerships even for the exact same make, model, age and mileage car, so you should shop around.
If you are looking to buy a new car, some dealerships will offer to contribute a lump sum towards the deposit and/or interest-free credit on the loan. However, it is unlikely you will be able to also negotiate much of a discount on the asking price, so you will need to balance the actual saving you will be gaining by taking the deal. Also, these offers are usually limited to brand-new cars, which means their value will depreciate as soon as you drive away from the dealership. It may be more cost-effective to opt for a nearly-new car without the lump sum or 0% finance.
H.P. from an online broker
There are a number of websites that scan through deals from a variety of lenders and help you find the most competitive deals, including confused.com and carbase.co.uk. Before you then ask for a quote from the lender, it is worth checking if they run a "hard" search on your credit file. If so, be wary, as too many searches in quick succession can damage your credit score. It is better if you can find providers who only run soft searches that won't leave a footprint on your credit file during this research process.
The good thing about using an online broker is they can highlight the options available for your specific circumstances, including if you have poor credit. It also gives you a baseline to compare the cost of the finance offered by a dealership.
Some of the major high-street banks also offer H.P. finance to existing current account holders. These tend to be at relatively attractive rates, so it is worth checking if your bank offers these deals.
What are the advantages of Hire Purchase?
- You will own the car at the end of the finance agreement
- It is easy to understand and doesn't involve the same calculations of future value that are involved with other forms of car finance
- There isn't a big balloon payment to pay at the end of the agreement, with only a relatively small purchase fee payable to transfer the ownership
- You aren't subject to limitations on mileage as you would be with other finance deals. Similarly you won't be obligated to repair any dents or scratches at the end of the finance deal
- You may be able to secure 0% finance on some cars
- As the finance is secured against the car, you may be more likely to be accepted if you have a less-than-perfect credit history as there is less perceived risk for the finance company
What are the disadvantages of Hire Purchase?
- It generally has a higher monthly payment than Personal Contract Hire (PCH), Personal Contract Purchase (PCP) or personal loans
- As the loan is secured against the car, it could be seized if you don't keep up with the repayments
- As you will not own the car until you make the final payment, you won't be able to sell it before that point or make any major modifications to it
What are the alternatives to Hire Purchase?
For a full breakdown of the different car finance options available, read our article 'Buying a car: what are the best finance options?'.
For an in-depth explanation of PCP, read 'What is Personal Contract Purchase?'.
For details of PCH, read our article 'Is Personal Contract Hire the best car finance choice for you?'.
