Car hire purchase (HP) is a car finance plan. After paying a relatively low deposit, you hire your car with the option to buy it by the end of the contract. Here are the facts you need to decide whether a hire purchase agreement could be the right car-buying option for you.
- What is hire purchase?
- How hire purchase works
- How to get the best hire purchase deal
- Hire purchase and conditional sale
- Other alternatives to hire purchase
- What to do if you can’t afford your repayments
What is hire purchase?
Hire purchase is a way to finance buying a new or used car. You (usually) pay a deposit and pay off the value of the car in monthly instalments, with the loan secured against the car.
This means you don’t own the vehicle until the last payment is made.
How hire purchase works
You need a good credit rating to get hire purchase deals at the lowest interest rates and always check the total amount repayable when comparing hire purchase with other finance methods.
In most situations, you first need to put down a deposit on the car you want to buy. This is usually 10% or more of the vehicle’s value.
The rest of the value of the car will then be paid off in instalments over a period of 12 to 60 months (one to five years).
Hire purchase is arranged by the car dealer, but brokers also offer this service. The rates are often very competitive for new cars, but less so for used cars. For second hand cars the annual percentage rate can vary from 4% – 8%. The lower the number the better. The rate could be higher for example because you don’t have a good credit score.
The loan is secured against the car, which is why you can’t own it until you’ve made your last payment, including paying the Option to Purchase fee.
Make sure you understand the terms and conditions of your loan before signing the contract. For example, once all repayments have been made you pay a final fee, known as the ‘Option to Purchase’, once you’ve paid this you’ll own the car. This is typically £100-£200, but it does vary so ask how much it will be.
Pros of hire purchase
- Flexible repayment terms (from one to five years) to help fit in with your monthly budget – but the longer the term the more you’ll pay in interest.
- Relatively low deposit required (normally 10% of the car’s price).
- Fixed interest rates so you know exactly what you’re paying every month for the length of the term.
- Once you’ve paid half the cost of the car, you might be able to return it and not have to make any more payments – find out more about cutting car finance costs.
- If you’re credit score is not that high it may be easier to get a hire purchase than an unsecured loan, as the car is used as collateral for the loan.
- It does not usually come with milage restrictions.
- You don’t need to find a large sum to purchase the car like with PCP.
Cons of hire purchase
- You don’t own the car until you’ve made your final payment, which means if you get into financial difficulties the finance company could take it away.
- You can’t sell or modify the car over the contract term without getting permission first.
- Monthly payments are usually higher than for PCP and leasing deals.
- Your deposit and term length will affect your monthly payments. Your monthly payments are likely to be higher the smaller the deposit is and the shorter the term of the loan.
- Until you’ve paid a third of the total amount payable the lender can repossess the car without a court order.
- It can be an expensive route if you only want a short-term agreement.
Examples of the cost of buying a car through hire purchase
Find out How to build an emergency savings fund so your car payments are covered if you have unexpected costs or a drop in income.
For a car priced at £25,000:
- Deposit: £1,000
- APR: 6.9%
- Term (length of the contract: 60 months (5 years)
- Monthly payments: £471.74
- Option to purchase fee (the fee so that you own the car at the end of the term): £200
- Total amount payable: £29,504.40
This example is based on figures from CarMoney.co.uk.
How to get the best hire purchase deal
There are two main options here:
- Getting the finance through the dealership you’re buying the car from. This is the most common way.
- Getting finance through an online broker.
It’s useful to search online first so you’re armed with some numbers to haggle with in dealerships. Offers can vary significantly online and in dealerships so getting more than one quote is essential.
To help you compare the different offers ask for:
- the APR you’ll be paying
- the total amount repayable
- the total cost of credit
- any additional fees.
You might also find it useful to see how much a loan will cost you. Use our loan calculator to help you work it out.
Top tips for getting the best deal
- Research the APR – the APR is the annual percentage rate of interest on your loan. Before going to a dealer, use a few comparison sites to see what APRs you can get. That way you’ll have an idea of what a good deal looks like.
- Always think of the overall cost – it can be tempting to look at low monthly repayments and decide that’s a good deal. But always add up what the total cost will be – higher monthly repayments for fewer months will mean less interest, which could mean a lower cost overall.
- Try different dealers – every dealer, even from the same manufacturer, can offer different deals. That means if you’re not getting an attractive price, you can go to a different dealer and try again there.
- Haggle – it’s not just the car price, but also the APR that you can haggle over. With lower interest you get reductions of hundreds or even thousands of pounds over the life of the hire purchase. It’s also possible to haggle over deposits and fees.
- Don’t rush – you don’t need to settle for the first offer you get, and if you’re given a contract, make sure to take your time and read it all through and the terms and conditions.
Franchised or independent dealership
When you buy a car, you’re likely to go to either an independent dealership (one that is run by a business and will stock vehicles from many brands) or a franchised (one that works with a manufacturer like Ford or Volkswagen etc).
Independent dealers will have a wider choice of cars, as it’s much easier for them to stock different manufacturers. You’ll also find mostly second-hand cars, which means typically vehicles are cheaper.
You won’t normally be able to find 0% finance deals or large deposit contribution deals, and APR will be around 5-10% – although you credit record will affect the rate you’ll be able to get.
Franchised dealers are the place to go for a new car – although remember new cars lose their value due to depreciation very quickly.
Franchises can also offer very competitive deals like 0% finance or contributions of between £500-£2,000 to a car deposit. These deals are more common on new cars, but you’ll also need a very good credit rating to quality for the best deals.
Hire purchase and conditional sale
Conditional sale is similar to hire purchase but you’ll own the car at the end of a conditional sale agreement. There is no ‘Option to Purchase’ fee payable, like there is with a hire purchase, so you’ll automatically become the vehicle owner once you’ve made all your repayments to your lender.
The agreement usually includes the condition that the goods don’t belong to you until you’ve paid the final instalment and the lender may be able to take back the car if you fall behind with payments.
Other alternatives to hire purchase
There are many ways to buy a car, from using cash by saving up, getting a bank loan, or using other means of finance.
What to do if you can’t afford your repayments
If you don’t keep up your car hire purchase payments, you might lose your car.
This article is provided by the Money Advice Service.