Hire Purchase, often referred to as HP, is one of the most popular car financing options. As the name suggests, you’re essentially hiring the car for the duration of the agreement, and then purchase it at the end. With HP, you make fixed monthly instalments towards the cost of the vehicle, usually spread out over 12 to 60 months. Once the final payment has been made, you’ll own the car outright.
How Does HP Work?
Just like a Personal Contract Purchase (PCP) deal, with HP you’d start by making a deposit towards the cost of the vehicle, then make monthly payments. But while the instalments of a PCP agreement go towards the depreciation of the car, with HP you’re paying for the car itself.
Your HP agreement may vary depending on the quote you're given and the lender, but overall it’s a simple process, conducted in three steps:
Make a Deposit
Unlike a PCP arrangement, where the majority of lenders require a deposit, a deposit isn’t always essential for a HP agreement. So if you’re not sure if you’re able to contribute anything towards the initial cost of the car, you may want to look into no deposit car finance options.
You should bear in mind though that the more you can afford to pay as a deposit, the lower your monthly instalments will be. A larger deposit will also reduce the total amount of interest you’ll pay.
Monthly Repayments
Your monthly payments will be made up of the total cost of the vehicle and the Annual Percentage Rate (APR), which is the interest applied to your car finance agreement. The APR will vary from contract to contract, and will primarily depend on things like your credit score and personal circumstances.
Generally, the higher your credit score, the better APR you’ll get, and less you’ll pay overall. You may also be able to save money on your car finance by making overpayments - it’s a good idea to see whether your lender allows you to do this without penalty.
Your Contract Ends
Once your agreement comes to an end, there may be a final charge, or perhaps an acceptance or document fee. Your initial contract will have this information, so make sure you read it carefully!
After these payments have been made, as long as you’ve kept to the agreement, you’ll own the vehicle outright. In this way, a hire purchase agreement is much like any other purchase loan, such as a mortgage.
Hire Purchase (HP) Example
When you take out a HP agreement, the process is incredibly straightforward. Hire purchase can also be flexible, depending on how much you can afford to pay each month. Just keep in mind that the cheaper the instalments, the longer you’ll need to take the agreement out for. This will mean you’ll be paying back more money overall.
Is HP the Best Option For You?
If you’re considering a hire purchase agreement, you’re probably looking for a car that will stay with you for a number of years, as you’ll keep the vehicle at the end of the term. But there are other things to consider when it comes to HP agreements, such as how much you can afford to repay each month. If the payments offered are too high, you may wish to consider a PCP deal instead.
Advantages of HP
- You don’t always need a deposit to take out a hire purchase deal, or may just have to make a low deposit
- Once you reach the end of your agreement, the vehicle will belong to you
- As you can spread the cost of your vehicle, you may be able to afford a better car with improved fuel efficiency than if you were to purchase a car outright
- As a hire purchase is essentially a secured loan, with the car acting as your secured asset, it’s often easier to take out HP than a personal loan
- It’s easy to budget for a HP, as you’ll know how much you’re due to pay each month
Disadvantages of HP
- If you’re unable to keep to the agreement, as the finance is secured against the value of the vehicle, you may need to return it to the lender
- Unlike with a personal loan, you won’t own the car until the end of the agreement, and the interest rates of a hire purchase can be higher than those of a personal loan
- If you want to sell or make modifications to the car before you own it, you’d need the permission of the finance company
- HP generally comes with higher monthly instalments than PCP
Other Things to Consider
- Do you want to own the car at the end of the agreement? If so, HP is probably your best option, though you may also wish to consider a PCP agreement, and make a balloon payment at the end of your contract
- Do you drive a lot of miles each year? With some car finance options there is a mileage limit, and you’d be charged if you exceed this limit. You can, however, negotiate with your lender for a higher limit, before entering into an agreement. Though if your mileage exceeds 20,000 miles per year, PCP may not be the best option for you, as a higher mileage limit comes with higher monthly payments. This is because a car that's done a lot of miles is typically worth less than a vehicle with fewer miles on the clock, so your balloon payment would be lower, making the monthly instalments (calculated on depreciation) higher. With HP, mileage isn't considered when calculating your monthly payments, and your total mileage won’t matter too much - as you’ll own the car at the end of the term, the lender won’t mind how many miles you’ve done at this point
- Do you need low monthly payments? If you don’t think you can afford large monthly instalments, you’ll either need to spread the cost of HP over a longer period, or look into a personal contract purchase
- What is your credit history like? A higher credit score will generally mean a better HP deal, though there are options for people with poor credit histories too
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