Hire purchase, or HP, was the most popular way of buying a new car before the introduction of personal contract purchase (PCP) schemes. It’s still popular for used car purchases. It is an instalment payment plan with regular monthly payments that enables you to have use of the car while you’re paying for it. You basically hire the car, while you’re paying for it, with the option to purchase it at the end of the deal.
You’re financing the cost of the car minus a deposit, which is usually around 10% of the car’s value. Depending on how much you can afford per month, you’ll pay for the rest of the car over one to five years with fixed monthly payments. The amount financed is usually subject to interest at a rate of 4 to 8%. There are 0% HP deals, but these usually require you to pay a larger deposit, sometimes 50%, up front.
It’s important to note that you don’t own the car until the final payment has been made. At the end of the monthly payments, there’s likely to be a small ‘option to purchase’ fee, which you need to pay to become the legal owner of the car.
1. You get to drive the car while you’re paying for it, so you don’t need all the money up front to buy it.
2. The final fee to buy the car outright is small (usually £100 to £200), unlike the far larger ‘balloon’ payment you need to make at the end of a PCP deal if you want to buy the car.
3. If you’re keen to own a car outright, this lets you do so while paying for it in instalments.
4. There’s no annual mileage limit, as there is with PCP and personal contract hire deals, so no matter how many miles you drive, you won’t have to pay an excess mileage fee.
5. The debt involved in a hire purchase agreement is secured against the car, so if you don’t have a strong credit rating, you’re more likely to be accepted for HP than for a personal loan.
1. You don’t own the car until the final payment has been made, so you don’t have the legal right to sell the car. If you do sell the car, the finance company might take action against you for any payments you owe.
2. Car companies are keener for people to buy on PCP rather than HP, so they often offer ‘deposit contributions’ of up to £1500 off the cost of a car with a PCP deal. They might also offer lower interest rates on PCP deals, so it’s important to check whether PCP or HP finance will work out cheaper overall; in many cases, PCPs are cheaper.
3. You’re financing the entire cost of the car – unlike a PCP deal, where you’re only paying for its depreciation – so the monthly payments will be higher.
