Hire Purchase Car Finance

What is Hire Purchase?

When it comes to vehicle ownership, hire purchase (HP) is one of the most effective forms of car finance. Designed to spread the cost of the car over a few years, hire purchase gives you the purchasing power you need, whether for a brand new car or one of the thousands of used cars in the UK marketplace.

A form of loan that’s tied to your car as security, hire purchase is a car finance product that offers:

• Lower interest rates than a conventional loan
• A way to spread payments over a period of two to seven years, tailored to suit you
• Uncomplicated car ownership
• Rapid application process

Hire purchase uses a structure that’s similar to many loans. As a form of asset-based finance, it uses the vehicle as security that mitigates lender risk, lowering interest rates as well as making hire purchase available for people with a less-than-perfect credit score.

With HP, after making an initial deposit payment, you spread the remaining cost of your car over the months of your agreement, typically 24 to 60 months (though in some cases up to 84). Once the agreement is fulfilled, the car is yours (sometimes following a small transfer of ownership fee).

It should be noted that during the contract, the car legally belongs to the finance company, with you listed as the registered keeper. This is part of the security for the finance company and enables them to repossess the vehicle easily should you fail to make repayments. 

The Hire Purchase Deposit

When you buy a car using HP you will need to have some money to be able to make the first finance payment. This is known as the deposit and is usually 10% of the total cost of the vehicle.

Some finance companies may be willing to accept a lower deposit if you cannot afford the full 10%, but this may result in higher APR rates and increased monthly payments to compensate.

One common way to cover the deposit is to offer your existing vehicle in part exchange. Many dealerships and garages offer part exchange deals to offset the cost of a new car, giving you the option of trading in your old car as part of the process.

Be aware, however, that you may be able to get a better return by selling your existing car and using the cash as the deposit - it’s less convenient than part-exchange, but may save you hundreds of pounds. 

Hire Purchase Monthly Payments

A HP agreement is calculated in a simple way, with the total of the loan (known as the principal) plus the interest, spread over the number of months and divided equally. To illustrate, consider this simple example of a used car:

• Value at time of purchase: £10,000
• Deposit of 10%: £1,000
• Loan principal: £9,000
• Interest rate: 11% APR
• Interest total over 5 years: £2,740.80
• Total to pay over 5 years (60 months): £11,740.80
• Monthly payment (£11,740.80 / 60): £195.68
• Total paid: £12,740.80 (deposit plus all 60 monthly payments) 

Owning the Car with HP

A hire purchase agreement is one with the ultimate goal of you owning the car and is designed with that in mind. At the end of the agreement, the vehicle registration is passed into your name and you are able to use the car or sell it on as you wish.

Hire Purchase vs. Other Car Finance Options

Is hire purchase the best car finance option for you? With many different methods to finance a car, it’s worth comparing HP against some of the other common alternatives:

HP vs. PCP

Personal contract purchase or PCP is the most common HP alternative. Designed as a flexible option where the final decision to own or not to own is left until the end of the agreement, PCP offers a different take on car finance.

The main difference lies in the balloon payment, a large final payment (sometimes as much as 50% of the original car value) that may optionally be paid at the termination of the contract to own the car. If the balloon payment isn’t paid, the car is returned to the finance company. It's your choice.

HP vs. PCH

Personal contract hire (PCH) is a long-term rental agreement that differs from HP significantly. There is no option to own the car at the end of the contract, and there are restrictions on the vehicle use. PCH offers cheaper monthly payments and a worry-free way to have a car, with maintenance deals and other support on hand to ensure that driving a car is as relaxing as possible.

Only available on new cars, PCH is best for those who do not want to worry about car ownership, resale values, or ongoing maintenance - people for whom HP is not a strong choice.

HP vs. Personal Unsecured Loan

An unsecured bank loan is an alternative to hire purchase that also results in eventual ownership. With increased financial flexibility, a bank loan isn’t tied to the car so it is possible to take out a loan to purchase the car and have extra cash available.

As a bank loan is unsecured, the risk is higher for the lender, resulting in higher interest rates and a more stringent application process. Unsecured loans may be a good alternative to HP for those with strong credit scores who are looking to purchase a car alongside other considerations.

HP vs. Credit Cards

If you have a large enough credit limit, it is possible to use credit cards to cover some, or all, of the car purchase. With good financial planning, zero interest balance transfers can be utilised to effectively negate any interest over the course of repaying. Along with flexible repayments, this can make credit cards a strong choice for car finance.

However, credit cards must be very carefully managed to avoid financial trouble and spiralling debt, and you must already have a strong credit balance to afford to purchase a car. Additionally, some dealerships will add a fee for using credit cards. Expertly managed credit cards may be superior to hire purchase where possible.

HP vs. Conditional Sale

Conditional sale (CS) is another form of car finance that is extremely close in structure to HP. In fact, many finance providers do not discern between the two, merely offering one alternative. The differences between CS and HP are so minor that at Clifton Private Finance we tend to only discuss hire purchase. 

What Happens if a Hire Purchase Repayment is Missed?

One common worry is what happens if a monthly repayment is missed, with the fear of repossession hovering like a cloud.

Communicate

It is important that you communicate with the finance company as soon as possible - even before a payment is missed if you know it’s going to happen. There are a number of things they can do to help, including allowing a payment holiday.

In all instances, open communication is preferable to avoidance. It gives the finance company the opportunity to help and advise, as well as presenting yourself as trustworthy and responsible.

Paying Late

Depending on your finance company, you will be given a small grace period. An unpaid direct debit is likely to be tried once more a week or ten days later, and you will be informed that such an occurrence has happened.

Consider Returning the Car

A voluntary termination is one where you end the finance agreement and return the car. With HP contracts, a voluntary termination is available once you’ve paid over 50% of the car’s initial value. If you have paid less than that amount, then you will have to make up the difference in order to return the car in this manner.

While this is rarely a positive measure, as you will lose your vehicle despite having made many payments on it, it is preferable to a repossession. If you voluntarily terminate the contract without having missed any payments, then it will not have a negative impact on your credit score.

Refinance

Depending on your circumstances, you may be able to refinance your car hire purchase agreement. This involves either renegotiating the terms with the finance company, or looking to another finance provider to provide funds to clear the hire purchase, such as with a debt consolidation loan.

Speak to a Clifton Private Finance refinance expert to learn more about your refinance options.

Repossession

Should you fail to communicate or miss multiple payments (or both), then the finance company will move to repossess your vehicle. You will be informed of their desire to take back possession of the car and your rights.

• If you have paid less than a third of the total HP repayments, then the finance company can simply turn up and take the vehicle if it is parked in a public place. They will have to obtain a court order to take the vehicle from private premises, such as your driveway.
• If you have paid more than a third of your total HP repayments, then the finance company will need to apply for a court order to seize the vehicle no matter where it is parked.
• If you have paid more than half of your total HP repayments, the option of a voluntary termination becomes available to you, allowing you to hand back the keys with no further debt.

The finance company will sell on the car (typically at auction) with a view to clearing any outstanding debt.

Repossession is a negative situation for both parties and everything possible should be done to avoid it. 

HP FAQs

Do I own the car with hire purchase?

At the end of the contract you will own the car outright. Throughout the agreement term, however, the car is legally owned by the finance provider and you are its registered keeper. However, for most purposes (such as insurance and maintenance) you should act in the same way as an owner, and there are no mileage restrictions for use.

Is HP cheaper than other car finance?

Because you pay for the entire car (other options such as PCP and PCH concentrate on the depreciation only), HP monthly repayments are generally higher than some alternatives. Additionally, you will need to have some money to pay upfront as a deposit. However, over time and if you intend to own the car, HP can be one of the cheapest ways to buy a car.

Can I drive my HP car abroad?

With most hire purchase contracts, driving your car throughout the UK and EU can be done without any issues, though you should contact your finance company to let them know if you are driving the car on the continent. As the car is used as security for the finance, most finance companies place a restriction on driving the car further afield than the EU. It is important to check your contract or contact your provider for specific information.

Do I have to pay insurance?

Yes. As with all car finance options, the obligation for all drivers to be fully and legally insured is down to you.

Do I have to cover the maintenance?

Yes. Repairs and maintenance for your car are fully your responsibility. Additionally, while you are still paying off the vehicle, you are expected to keep the car in a good condition so that it maintains its value as collateral.

It’s worth noting that new cars will come with a warranty, as well as being generally more reliable, leading to significantly lower maintenance costs.

Can I use HP to buy a used car?

Yes. Unlike some car finance options, hire purchase is great for both new and used cars.

Do I have to accept my dealer’s HP agreement?

No. You can shop around and get a better hire purchase agreement. Clifton Private Finance are here to help you find the best deal to suit your circumstances.

What happens if I write off my HP car or it is stolen?

Your insurance payout will be used to cover the outstanding debt. Often this is paid directly to the finance company. There may be a difference between the amount the insurance company pays out (based on your car current market value) and the amount left outstanding to pay, which could result in you owing the finance provider money.

Additional insurance, known as GAP insurance exists to cover this difference. It is typically worth getting GAP insurance to make sure you are never left out of pocket.

If the insurance payout is greater than the balance of the hire purchase agreement, the difference will be paid to you. 

Apply with Clifton Private Finance

To take a look at the finance you could obtain, why not use our car finance calculator - and then, when you’re ready, give us a call. With our help, you’ll soon be driving away your dream car.

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