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What Is Hire Purchase And How Does It Work?

If you’re looking to spread the cost of financing your car, hire purchase could be one option to consider.

What is hire purchase?

A hire purchase agreement (HP) is a type of borrowing and one way to finance a new or used car.

Unlike a typical loan, with hire purchase you don’t own the goods (in this case the car) until you’ve paid in full – so essentially, you hire it while you pay it off.

A hire purchase agreement usually involves an initial deposit – although we offer £0 deposit options – followed by an agreed term of monthly payments until the last payment is made and you own the car.

How does hire purchase work?

Hire purchase spreads the cost of the vehicle you want across a series of monthly payments. Once you’ve made the final payment, the car is yours.

Lady looking at car on laptop

The deposit

So, you’ve chosen the car you want and now you’ll have an idea of how much you need to borrow. The first step is then to put down a deposit. The deposit on a hire purchase agreement is usually low – typically around 10% of the car’s price. However, no-deposit options are also available.

The bigger the deposit you put down, the lower your monthly payments will be, as you’ll reduce the overall interest and the balance due.

Monthly payments

After paying the deposit (if you choose to), the remaining balance and interest is split into a series of fixed monthly instalments.

The term of the agreement usually lasts between two and five years. The longer the term, the less you’ll pay ever month, however, the amount of interest you’ll pay overall will be greater.

The interest rate is always fixed, no matter what Bank of England rates do, so you’ll always know how much you need to pay every month and can budget accordingly.

Owning the car

Once all the repayments have been made, there may be a small repayment fee (option to purchase fee) due. This is usually around £100 – £200 but does vary, so it’s worth asking about it upfront.

After this, the car is then signed over to you and you become the legal owner.

Pros and cons of hire purchase

There are several pros and cons to taking out a hire purchase agreement.

Lady in car

Pros

  • Spread the cost of the car over a number of years to suit your budget and circumstances
  • Relatively low or no deposit needed
  • Option for early repayment
  • Fixed interest rates for the life of the agreement, so you know what you’ll be paying every month
  • Fewer restrictions such as mileage
  • Easy application process
  • Own the car once all the payments have been made

Cons

  • Failure to make payment means the car could be repossessed
  • Monthly payments are usually higher than for PCP or leasing deals
  • A lower deposit means higher monthly payments and a longer term loan
  • Expensive way of borrowing if you’re looking for a short-term agreement

Read more about the pros and cons of hire purchase.

Used vs new car hire purchase

Hire purchase agreements are available for both new and used cars, so it’s really a matter of personal preference as to which you choose.

If you’re opting to purchase a new car on hire purchase, it could mean you could afford a newer model with cleaner emissions and more modern technology.

With a new car, there are often more deals when it comes to car finance, such as deposit or finance contributions. However, new cars also have higher prices, so you’d be looking at higher monthly repayments unless you had a larger deposit saved up.

On the other hand, buying a used or nearly-new car through hire purchase may mean lower monthly payments.

But there’s often a more limited choice when it comes to finding the car you want. It’s also wise to take into consideration the increased repair costs that may come with owning an older vehicle.

How to get the best hire purchase deal

There are many hire purchase deals out there; from ones with £0 deposit to ones with low interest rates.

Men shaking hands at car showroom

Usually, the best offers come from the dealership you’re going to purchase with.

Remember, often the best interest rates are available to those with a better credit rating, so it’s worth putting some time into looking at your credit report before you start to apply for finance.

To help ensure you get the best deal, make sure you’re asking these questions:

  • What is the APR on the deal?
  • What is the total amount repayable by the end of the agreement?
  • Are there any additional fees?
  • What is the total cost of credit?

Other options

There are many other ways to buy a car, such as saving up and purchasing outright. Alternative finance options to hire purchase include:

Personal Contract Purchase (PCP)

PCP also allows you to spread payments for your car over a long period of time (usually two to four years). However, while you do still make monthly repayments, when the term ends, you can either make a lump sum payment to own the car outright or use any equity you have in the deal to put a deposit down on a new car. Or you can simply hand the car back.

Personal Contract Hire (PCH)

Also known as leasing, PCH works like a car rental over a longer period. You pay an initial amount and monthly payments thereafter to lease the car for an agreed amount of time. When the contract comes to an end, you can hand the car back or lease another.

Personal loan

A personal loan is where you borrow an amount of money from a lender (usually a bank or building society) and pay it back over a fixed amount of time along with interest. The sum is transferred into your bank and you can then effectively treat it as if it were your own cash to purchase a car outright.

How are hire purchase payments calculated?

Simply put, hire purchase payments are calculated by splitting the cost of the car, plus interest, over a deposit and a series of fixed monthly payments.

The monthly payment is dependent on the amount of deposit you put down, the length of the agreement term and the interest rate on your deal.

Let’s look at some examples:

Car cost: £10,000

Deposit: £0

Amount of credit: £10,000

Length of term: 60 months

APR: 12.9%

Total amount payable: £13,406.20

Monthly repayment: £223.42

So, to break that down:

Car cost: How much the car costs.

Deposit: How much you pay upfront

Amount of credit: How much you’re borrowing (the cost of the vehicle minus any deposit)

Length of term: How long your car finance agreement lasts

APR: The percentage of interest applied to the money borrowed

Total amount payable: How much, including interest, you’ll repay over the course of your car finance agreement

Monthly repayment: How much you’ll pay each month (in this case it’s £13,406.20 spread over 60 months)

When will I own the car?

With hire purchase, the loan is secured against that car. So, until the agreement is paid off in full, the car remains the property of the finance company.

Cars on forecourt

Once you’ve finished paying all the monthly instalments, there may be a small fee to complete the agreement.

Often known as an ‘option to purchase’ it is usually around £100 – £200, and once it’s paid, you officially become the legal owner of the car.

Additional costs

When considering the affordability of your new car on hire purchase, it’s important to think of other costs that are involved, as well as your monthly repayment.

These include the car tax, insurance, fuel, MOT, and repair costs.

Of course, car tax and fuel consumption can be cheaper on newer cars, so you may find a higher spec vehicle more cost-effective over the long run.

However, considering and budgeting for these costs ahead of time could save you money over the years.

Cancellations

There are many reasons people might want to cancel their hire purchase deal early.

Your financial circumstances may have changed, making repayments unaffordable or a struggle to meet. Maybe you no longer need a car, or alternatively want to get a new car sooner than anticipated.

Whatever the reason, it’s possible to cancel your HP deal earlier on, but usually you must have repaid 50% of the total finance amount back first.

If you haven’t reached the halfway point of your agreement, it doesn’t mean you can’t cancel. However, you’ll have to make up the difference before you terminate the agreement.

To cancel the agreement, you need to inform the lender in writing and return the car in a good condition.

By cancelling, it may appear on your credit report, but it would be unlikely to affect your score or hamper your ability to borrow in the future.

Risks of hire purchase

The main risk with hire purchase is that it’s a secured loan. Meaning that if your financial circumstances change for any reason, and you can’t keep up with your repayments, the car can be repossessed.

Until the final payment and any option to purchase fee has been settled, you don’t own the car.

Any late or missed payments on your hire purchase agreement will also be flagged on your credit report and could affect your credit score and chances of borrowing in the future too.

Finally, even though you don’t legally own the vehicle until the agreement comes to an end, the effects of depreciation and the costs of maintenance still all lie with you.

As hire purchase agreements tend to run over a longer period, it may mean there’s more risk of depreciation even before the car is fully yours.

Interested in other forms of finance or want to find out more about hire purchase? Contact us, using the button below.

Representative Example of Credit

We expect more than 51% of our customers to achieve this rate.

Loan Amount Total Cost of Credit Representative APR 60 Monthly Payments Deposit Amount Loan Term Total Amount Payable
£7,500 £3831 19.1% APR £188.85 £0 60 Months £11,331

All offers are subject to change at any time, you must be 18 or over and finance is subject to status, vehicle availability and terms and conditions apply. We can introduce you to a limited number of finance companies, a commission may be received. Failure to maintain payments may result in termination of your agreement and the vehicle being returned, this could affect your credit rating and make it more difficult to obtain credit in the future. All prices correct at time of publication.

We purchase a wide variety of vehicles from all over the country to ensure the best quality and value for our customers, all of our cars go through a thorough inspection process and if they do not meet our standards we do not sell them. We endeavour to inform our customers (where possible) the provenance of the vehicle they are buying and as such we will always inform you if the vehicle has previously been either an ex fleet or hire car. Should your vehicle be an ex hire/fleet car please do not be concerned as we would never value this vehicle differently when you come to part exchange it and there is no difference to the CAP valuation either.

You should try and estimate the distance you will travel as accurately as possible to try and avoid excess mileage charges at the end of your contract.

All pictures and/or photos and car descriptions on this site are for illustration and reference purposes only and are not necessarily the vehicle on offer. All offers are subject to change at any time and are subject to finance approval and vehicle availability. All prices correct at time of publication. E & OE.

Hippo Vehicle Solutions t/a ‘Hippo Motor Finance’ is authorised and regulated by the Financial Conduct Authority. FRN 658076. We are a Credit Broker not a Lender and can introduce you to a limited number of lenders. We typically receive a fixed commission calculated by reference to the vehicle model, product or amount you borrow, for introducing you to a lender but this does not affect the interest charged on the agreement, all of which are set by the lender. All offers are subject to change at any time and are subject to finance approval.

We endeavour to ensure that all information including the specifications and finance availability are accurate. Whilst we make every effort to display correct information we are aware that errors may occur occasionally. We are not able, therefore, to guarantee the accuracy of all information especially when given to us by third parties. If you do require clarification of some information you have seen on our website, please email us at info@hippomotorgroup.com . This does not affect your statutory rights.

We are a broker not a lender and our registered office is Unit 26 Trident Park, Trident Way, Blackburn, BB13NU.

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