Hire purchase
Hire purchase is a type of car finance where you pay for the car in monthly instalments, as opposed to paying the full amount in one go. But how does it work, and what are the benefits of this type of finance agreement?
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What is hire purchase?
With a hire purchase agreement, you make a regular monthly payment and the finance provider lets you use the vehicle (the ‘hire’ bit). Once you have paid everything due, including a final ‘option to purchase’ fee, the vehicle then becomes yours (the 'purchase' bit).
As a rule, hire purchase repayments are worked out by calculating the interest (and fees, if applicable) on the amount you’re borrowing. The capital (the amount you want to borrow) plus interest equals the total amount payable.
This is then divided by the number of months over which you want your agreement to run, giving you the monthly repayment figure. Fees may also be added to the first and/or last instalment (depending on the product and lender). To give an example:
You want to borrow £15,000 to purchase a car
You select it to be paid over 60 months based on a cash price of £15,000 with no deposit
You have a fixed interest rate of 6.25% flat per annum (12.1% APR).
Your amount payable would be £328 a month
Your total cost of credit would be £4,688
Your total amount payable would be £19,788 (the total amount payable includes a £50 opening fee and £50 ‘option to purchase’ fee)
How does hire purchase work?
Benefits of hire purchase
Hire purchase is one of the most popular car finance types in the UK, and for good reason. There are several advantages to choosing a hire purchase agreement to finance your car over other options such as personal contract purchase (often referred to as PCP) and personal contract hire (also known as PCH). These advantages include:
Fixed interest rates mean you know exactly how much you are paying every month (also available with PCP and PCH agreements)
No annual mileage restrictions
Hire purchase considerations
Hire purchase might be a good financial fit for you, or it might not be – it all depends on your personal circumstances. There are a few things to consider when deciding whether HP is the right finance option for you:
If you can’t keep up with the monthly payments, your lender could take the car back – so you should be absolutely sure that you’ll be able to meet all future payments.
Because you pay interest on the amount you borrow, hire purchase agreements are likely to be more expensive than purchasing a car outright in the long run.
The amount of finance you’re offered is based on your credit score and meeting certain eligibility criteria, so it’s not guaranteed that you’ll be approved.
Throughout the period of your agreement, you won’t be able to alter, sell or dispose of the car without permission from your lender. This is because the car technically still belongs to the lender until you’ve made all your agreed payments.