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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?

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).

Example hire purchase agreement

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)

How does hire purchase work?

  • You choose the car you want to buy and agree on a deposit

    The deposit amount is typically around 10% of the car's value, although this can vary depending on the lender and your credit score.

  • You agree on the loan term and monthly payments

    The loan term is usually between one and five years, and you'll make fixed monthly payments for the duration of the loan.

  • The lender buys the car and you take possession

    The lender buys the car and owns it until you make the final payment on the loan.

  • You make monthly payments

    You'll make fixed monthly payments to the lender for the duration of the loan. The payments will include interest, so the longer the loan term, the more you'll pay in interest.

  • You own the car once the loan is paid off

    Once you make the final payment on the loan, you'll own the car outright if you choose to pay the option to purchase fee.

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)
  • 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 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.

FAQs about hire purchase

  • What are hire purchase cars?

    Hire purchase (HP) cars are cars that have been purchased using a hire purchase finance agreement. With HP, you make a deposit on the car and then pay off the remaining balance, plus interest, in fixed monthly instalments over a set period. Once you make the final payment plus the ’option to purchase’ fee, you own the car outright.

  • 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.

  • What's the difference between hire purchase and PCP?

    Hire purchase (HP) and personal contract purchase (PCP) are both types of car finance agreements that allow you to spread the cost of a car over a period of time. However, there are some key differences between the two:

    1. Ownership: With HP, you own the car outright at the end of the agreement, whereas with PCP, you have the option to either buy the car outright or return it to the lender at the end of the agreement.
    2. Payments: With HP, your monthly payments are typically higher than with PCP because you are paying off the full value of the car, plus interest, over the term of the agreement. With PCP, your monthly payments tend to be lower because you are only paying off the depreciation of the car, plus interest.
    3. Mileage: PCP agreements typically come with a mileage limit, which means that if you exceed the limit, you may be charged extra fees. With HP, there are no mileage restrictions.
  • Can you pay off hire purchase early?

    The terms and conditions of paying off your agreement early can vary depending on the lender and the specific agreement. If you're considering paying off your HP agreement early, it's a good idea to contact your lender and ask for a settlement figure. This will be the amount you need to pay to settle the loan in full, including any outstanding interest and fees.

    Once you have the settlement figure, you can decide whether paying off the loan early is the right choice for you. While paying off the loan early can help you save money on interest and reduce your debt, it's important to make sure that you have enough funds to cover the settlement figure before making any payments.

  • Can you sell a car on hire purchase?

    Technically, you cannot sell a car that you have purchased using hire purchase (HP) until you have paid off the entire loan and own the car outright. This is because the lender legally owns the car until you have made the final payment on the loan.