A simple guide to how hire purchase car finance works and how to tell if it's right for you.
Hire purchase contracts are probably as old as cars themselves. Most car dealerships offer them on the cars they sell, but you can also get a hire purchase contract separately from a broker and then choose a car from anywhere.
How hire purchase works
It's really all in the name. Hire purchase (HP) contracts let you hire the car while you make monthly payments to buy it outright.
During the contract, you effectively ‘borrow’ the car from a dealership or lender for an extended period of time. Hire purchase terms can last up to five years, or as little as one year. A longer term means lower monthly repayments. The flip-side is that you’ll pay more in interest.
You then make monthly payments to the dealership which count towards the cost of the car. They also cover any interest you're being charged. Because the car dealership owns the car while you pay for it, if you have trouble making repayments, your lender can take the car away to pay off your debt.
It's worthing noting that a hire purchase contract is a form of credit. The car dealer or lender will usually want to check your credit history (i.e. your credit report) to make sure you can afford the monthly repayments.
Deposits on a hire purchase contract
You'll need to pay a deposit when you first get the car. Most dealerships and lenders usually require 10% of the car’s purchase price up front. However, you can also put down a larger deposit. Obviously, the larger your deposit, the less you’ll have to pay each month.
Sometimes, dealers offer a contribution towards your deposit on particular car models. This will obviously make an attractive deal. Be aware though, there may be strings attached. In particular, you may be forced to take that dealer’s hire purchase terms, which may not be as good as those offered by competitors. For example, the annual percentage rate (APR) may be higher.
What happens when the hire purchase agreement expires?
When you reach the end of the agreed contract, the car is yours to keep - without any lump sum to pay. The dealer or broker will transfer ownership over to you. To do this, you’ll have to pay a small administrative fee - usually between £100 to £200 - called the ‘option to purchase’ fee.
This fee covers your lender’s administrative costs for handling the transfer of ownership paperwork on your behalf.
Is a hire purchase contract right for me?
If you know you want to own the car at the end, hire purchase deals could be a good option for you.
Because your monthly repayments cover the car's full purchase price, when the contract is up you won't have to pay extra to own the car outright (just a small admin fee).
With other car financing options, such as personal contract purchases, your monthly payments only cover part of the cost. With these you’ll need to make a large lump sum payment - called a balloon payment - if you want to keep the car at the end of the term.
It could also be a good option if you have 'bad' credit. Getting a personal loan is typically the cheapest way to buy a car (aside from up-front cash). But getting a loan can be tricky if your credit score isn't in the best shape. With a hire purchase plan your debt is secured against the car. This makes it less risky for lenders to give you credit on hire purchase terms, because they can simply take their property back.
What to watch out for
- Hire purchase contracts can be expensive.
APRs - and therefore your monthly repayments - are typically higher than those on other types of car finance. According to CarFinance 247’s online calculator, the best rate for someone with an 'excellent' credit score is currently 7%. By contrast, APRs on personal loans are as low as 2.8%.
- The car isn't yours until the end
This means you cannot sell or otherwise offload the car. It also means your lender can take the car away at any time if you miss repayments. If this happens, you won’t get back anything you’ve already paid.
- Additional fees and charges may apply
You may get have to pay charges if you don’t follow your agreement’s terms and conditions. For example, you may have to pay a penalty if you miss a service.