There are many ways to purchase a car. Hire purchase is an increasingly popular way to get your dream car without a large upfront payment. Find out what is hire purchase and whether it’s the best method for you to get the wheels you want.
It’s becoming increasingly common to buy a car on hire purchase in the UK. Hire purchase is the hiring of a car over an agreed period. At the end of the contract period, you can choose to purchase the car outright.
How does hire purchase work?
Hire purchase is one of the types of car finance that can help you cover the cost of a new or used car. We recommend comparing your options with a broker once you have chosen the car you would like. A broker may be able to find a better deal for your hire purchase than the dealership can offer.
You will pay a deposit to begin the hire purchase agreement for the car. The deposit is usually around 10% or more of the value of the car. In most cases, you can determine the total of the deposit and agree this with the lender. Remember, a higher deposit will result in lower monthly repayments. When you are entering your hire purchase agreement, you will know what each monthly repayment will be and for how long you will be paying. Repayments are frequently made over one to five years.
Once you have paid the deposit, you will become the registered keeper of the car and begin to make regular monthly repayments. This does not mean you own the car outright yet. These monthly repayments will be made over a period agreed with your car dealer. As with any loan or finance agreement, it’s important that you don’t miss any repayments. This could result in penalty charges or even having the car repossessed.
Remember that you do not own the car outright until all the repayments are made. Once you have paid your final monthly instalment, there may be a one-off final payment to make before you can own the car outright. This will have been outlined when establishing your hire purchase agreement with your dealership or broker.
What’s a hire purchase agreement example?
You’ve found the car you’d like – let’s take a look at an example of a hire purchase agreement based on a car that costs £20,000. The costs could be broken down as follows:
- 10% deposit: £2,000
- Borrowing £18,000 with an APR of 6.2%
- Hire purchase agreement term of 48 months (four years).
- Each monthly repayment will be: £422.98
- Total amount to repay: £20,303.15
- Total cost of purchase £22,303.15 (deposit + loan + interest)
This is a guideline only and there may be other charges such as a one-off fee to purchase the car outright once you have made every repayment.
Advantages of a hire purchase
Hire purchase has some advantages which make it a good option for finding your dream car:
- Easily know how much you will need to put aside each month for your monthly repayments.
- Fixed interest rates also help with the budgeting process.
- Hire purchase means you can get a car that you might not be able to afford outright.
- You will own the car fully once all monthly repayments are made and the one-off fee has been paid (if applicable).
- No mileage restrictions as with PCP (Personal Contract Purchase).
- Hire purchase may be more accessible than a personal loan if you have a low credit score.
Disadvantages of a hire purchase
It’s important to consider some of the disadvantages when you choose to buy a car on hire purchase:
- Monthly repayments can be more expensive when compared with other finance options such as PCP or a personal loan.
- You will not own the car outright until all repayments have been made. If you cannot make repayments, the car could be repossessed.
- If you choose a small deposit and long repayment term, monthly costs could be high.
- Your credit score can be negatively affected if you miss repayments.
- If you miss repayments before you have repaid a third of the total amount owed, the lender can repossess the car without a court order.
- Long repayment terms such as four or five years mean you will be paying a high amount of interest.
Is hire purchase right for me?
Choosing to buy a car on hire purchase depends on your personal circumstances. If you have a low credit score, you may find it easier to access credit via hire purchase than with a personal loan. Alternatively, hire purchase can be a good option if you simply wish to spread out the cost of a new car.
If you are in a difficult financial situation and not likely to have a steady income for the period of the hire purchase agreement, hire purchase may not be the best option for you. Missed payments may result in the car being repossessed and you will not be reimbursed for the payments made before that point.
Can I pay off my hire purchase early?
Yes. If you are financially able to cover the cost with a lump sum, you can pay off the hire purchase agreement early. This is a good way to own the car outright and save a little on interest. If your remaining repayment amount is less than £8,000, there is often no extra fee to consider if you pay off early.
If the outstanding repayments amount to more than £8,000, a fee will be charged. This fee is capped by law to be the lowest option between:
- 1% of the amount paid early or 0.5% if you have less than 12 months left on your agreement
- The remaining interest
If the lowest option here is to repay the remaining interest, you won’t have saved any money overall. However, you will now own the car.
What happens at the end of hire purchase?
Once you have made every repayment, the hire purchase agreement will come to an end. However, you may still not be the legal owner of the car once you have made every repayment, depending on the terms of that agreement. If you wish to own the car outright, you may have to pay an additional, one-off Option to Purchase Fee. By paying this, the transfer of ownership from the dealer to you is completed, and you are the full legal owner of the car.
What type of finance is hire purchase?
Hire purchase is a type of car finance that allows you to own the asset (car) while making repayments for the loan. You will repay the cost of the car minus the initial deposit as well as monthly interest.
Do you own the car at the end of HP?
You will own the car once all the repayments have been made on your hire purchase agreement. Check before you begin your agreement if there is a one-off Option to Purchase Fee which applies after all monthly repayments are made.
Can you sell a car that has HP on it?
No. If you are still making repayments on your hire purchase agreement, the lender is still the legal owner of the car. You can sell your car once the repayments have been settled, and you are the legal owner.
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