Hire purchase is just one of several ways that lenders typically offer to finance your next car by paying monthly, as opposed to paying the full amount in one go. But what is it, and what are the benefits of this type of finance agreement?
What is hire purchase?
With a hire purchase agreement, you a 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)
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 rather than going for 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)
- Deposits can be flexible or even not required at all
- No annual mileage restrictions
- You don’t need to make a large final payment to become the car owner as you would with a balloon payment on a PCP agreement. After your final payment and any option to purchase fee, the car belongs to you.
Hire purchase considerations
While hire purchase is a great finance option, there are a few things to consider that might impact whether it is the right choice for you:
- If you fail to keep up with monthly payments your lender could take the car back - so you should be absolutely sure you’ll be able to keep up with future payments
- Hire purchase agreements will likely be more expensive in the long run than purchasing a car outright with cash because you pay interest on the amount you borrow
- Your finance is decided on your credit score and meeting certain eligibility criteria, so it’s not guaranteed that you’ll be approved.
During your agreement, you aren’t allowed to alter, sell or dispose of the car without your lender’s permission - as it’s still the property of the lender until you’ve made all your agreed payments.
Is hire purchase for you?
Car finance in general is a very personal thing, as it depends on quite a few factors. This means that there is no one-size-fits-all answer for how to finance your car, and any deal you may be offered will partly depend on your credit score.
That said, hire purchase agreements are great for those who want to own their car outright at the end of the agreement, without having to make the sort of big lump sum payment usually required for a PCP balloon payment.
Oodle specialise in hire purchase and does not offer PCP or PCH agreements, but if you have any questions about hire purchase agreements, we’d love to help - you can chat to us on 01865 47782.
How are hire purchase repayments calculated?
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 documentation fee and £50 Option to Purchase fee)
Frequently Asked Questions about hire purchase
- What is the hire purchase interest rate?
The hire purchase interest rate is the amount lenders charge for borrowing the amount you chose. Lenders normally set a range of interest rates and the rate you are offered will depend on various factors, including your credit score. For example, if you have a good credit score with a history of making repayments in full and on time, a lender is more likely to offer you a lower interest rate. If you have a poor credit score, you’re likely to have to pay a higher interest rate.
The interest rate is a proportion of an amount loaned (principle sum) which a lender charges as interest to the borrower, normally expressed as an annual percentage. It is the rate a bank or other lender charges to borrow its money.
- Who is responsible for insurance, parking/speeding tickets and general upkeep of the car?
While the lender still owns the car until you’ve made all of your payments, you will be responsible for any charges relating to the car during the agreement including upkeep cost, insurance, servicing, MOTs and any fines. This will all be set out in the agreement with your lender.
- Can I pay more than my monthly arrangement?
If you can afford to, you can pay off your whole agreement in one go, at any time. Alternatively, if you only want to pay off part of it, you can do that too (it is know as ‘partial early settlement’). Various conditions apply to early settlements and they may not be available in all cases, so please contact us for more details.
Oodle does not charge you for early repayments and you may even get a rebate for future interest charges, in some circumstances, so please do get in touch if you would like to discuss early settlement with us.
Please note early settlement figures will only be for your vehicle finance and may not include associated loans for add-ons, negative equity funding or other items. Those associated loans will still need to be paid off, as well as your primary vehicle finance.
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