If you're in the majority of people who can't buy a car outright, you need to look for alternative ways of getting your hands on a hot new set of wheels. There are loads of car finance deals available to help you out. They’re not exciting, they’re not fun, and they can be frustrating - but sometimes it's gotta be done!
You've done a bit of research and all of this PCP/HP/lease chat has left you screaming SOS. Fear not. We're here to help.
In Britain, the most common forms of car financing are:
- Car Hire Purchase - Pay a deposit, make monthly payments, and you eventually own the car once all payments are made.
- Leasing - Pay an initial payment, make easy fixed monthly payments, and you hand the car back at the end of the contract period.
- Personal Contract Purchase - Make a deposit, make monthly payments, and hand back the car or make a massive balloon payment to secure ownership.
- Bank Loan - Beg the bank for a loan, buy the car outright and then make monthly payments to the bank, praying you don't go broke.
Note that for all of the above, you're going to need to have a decent credit rating, so you ought to visit a site like ClearScore before you apply to check you’re in the green.
This article is going to have a look at number 1 on that: list Car Hire Purchase (HP). If you’re keen to learn about the other forms too, check out our other articles for the low-down on PCP finance and leasing.
So, what is a car hire purchase agreement?
A car hire purchase agreement is a finance option that allows you to essentially hire a car for a set period of time, but these payments are contributing towards you owning it at the end of your contract.
However, unlike just taking out a personal loan from your bank, you don't actually own the car during the contract term - only at the end, when you have no more monthly instalments, hence the hire part. The car belongs to the finance company, so you'll have to keep that smug "well, I actually own my car” look off your face until your term is up.
How does hire purchase work?
The HP finance process is fairly simple. Here's a rundown of how it works:
- You find a car you fancy and that you can afford.
- You head to a trusted dealership and ask about HP finance deals to pay for it.
- You put down the deposit. Dealers often ask for around 10% of the car's value. Some dealers offer a deposit contribution on some new cars.
- Pay your monthly payments plus interest for the next (typically) 1-5 years.
- Pay the 'option to purchase' fee (typically £100-£200) and you own the car!
So, I own the car?
But during the 1-5 year term - no, you don’t own the car yet. It belongs to your finance company, meaning that your debt is secured against the car.
This means if something happens and you can't pay the monthly fee, the car will be snatched from your driveway.
While that scenario doesn't sound great, it means that there is less risk for the finance company. Instead of giving you an unsecured loan, with nothing to take off you if you can't pay, they can take the car away. Like an angry parent confiscating your mobile phone or Xbox.
Less risk means a higher chance of being eligible. For those of you who want to own a car outright eventually and can't get a decent personal loan due to poor credit rating etc, it's worth checking out a HP finance deal.
How are payments calculated?
Ah, yes. Interest. Always lingering around to spoil the party.
With car hire purchase, you payments are calculated by taking the total purchase price of the car, subtracting your deposit, dividing this by the number of months in your contract, and adding on APR interest, which is typically 4-9%.
Let's take a look at some figures:
You want to drive a Seat Ibiza which costs £14,498 new.
Taking out a HP agreement over 4 years at 8% interest, this is likely to be your total cost:
- Initial deposit/lump sum at 10% - £1,699
- 'Loan' amount- £13,049
- Total interest - £2242.08
- Option to purchase fee - £200
- Total cost to own the car - £17,190
Overall, this car will cost you £353 a month after the deposit and before the option to purchase fee.
How does this compare to other options?
A PCP deal for this car for a term of 48 months, with a mileage limit of 8,000 miles per annum, will cost you £225 a month. To own your car, your balloon payment would be a whopping £6,966.70. Your total ownership cost would be £18,000.70.
Let's take a look on LeaseFetcher for the same Seat Ibiza . With an initial deposit of £947.88, a mileage limit of 8000, you're looking at a monthly payment of £157.98 over 4 years. Your total cost of leasing over 4 years would be £8530.92.
Now, the lease is cheaper monthly, but you won't ever own the car - while we're trained to see this as a negative thing, is it really?
How often do I change my car?
Do you want a car for the next decade or a new one every 3 or 4 years?
If you want the former, a Hire Purchase deal or personal loan is a great option for you.
If you don't want to worry about driving an older car, whether it be because of the reliability issues it may present or for more aesthetic reasons, a lease is a good shout.
If you're happy to always have a car loan payment you can afford, we think a lease is better than a HP/PCP because:
- You're always sitting with a brand new car. This means the latest tech, safety features, and no MOT for 3 years.
- You don't have to worry about road tax - it's paid for by the leasing company.
- You don't have to worry about getting taken advantage of in a part exchange or having to awkwardly talk to Gary as he spends 2 hours inspecting the car you've listed on AutoTrader and then swiftly leaves.
Am I stuck with the car for the full term?
No! You have the option of voluntary termination. This allows you to bail out of the contract early if you've paid at least half of the total cost including interest.
You could hand the car back after you have paid half of the loan amount (not including deposit), plus interest.
So, if you were to take out a HP for the Seat Ibiza mentioned earlier, your total loan amount plus interest would be £15,291.08
To pay off half of this and hand the car back, it would take around 2 years and 3 months.
If you just can’t wait that long and you haven't paid half yet, you can pay the remaining repayments up to the halfway mark all at once and hand the car back.
This has pros and cons. It gives a route of escape if your circumstances change and you can no longer afford the repayments.
However, all of the cash you've put towards the car doesn't grant you any ownership - so even though you've paid half the value, you don't own half the car. Also, if you have any excess mileage, you'll have to pay a fee for this too. So, while you can hand the car back early, you shouldn't go into a HP agreement planning to do so.
Are there any hidden charges in a car hire purchase agreement?
There shouldn't be any hidden charges, but some dealers or finance providers might charge an admin fee for taking out the loan - so make sure you ask about this beforehand.
What are the advantages of hire purchase?
A Hire Purchase agreement is great car finance choice for those of us who want to own a car. Perhaps you want to pick up a new Toyota and run it for the next 20 years - you don't care too much about the latest tech and are well-versed at keeping your vehicle well maintained.
In this case, a HP finance deal is a great choice! It offers you the following:
- Fairly flexible repayment. With most deals typically lasting from one to five years, you can get something to fit your monthly budget. While it's tempting to go for the 5-year option, remember that this means you'll be paying more interest.
- Option to bail. It can be comforting knowing that if things in your life take a bad turn, you can hand your car back - you're not trapped with a car you can't afford.
- Fixed interest rates. No surprises. You know what you're paying from the get-go.
- Good for low credit scorers. You're more likely to get accepted for a HP agreement than for a personal loan.
- No mileage restrictions. You can drive the car as much or as little as you like!
- Small final payment. Unlike the astronomical balloon payment you get with PCP, your option to purchase fee is pretty low with a HP agreement.
What are the disadvantages of hire purchase?
If the thought of driving the same dusty old car (seriously, what is that smell?) for the next 5+ years make you cringe then you definitely shouldn't take out a HP finance deal.
For one, HP monthly repayments on brand new cars are likely financially out of reach for the vast majority of us. As such, you're going to have to take out a loan on an older, less reliable used car. This is a stark contrast to a lease, where you drive a brand new car.
So with HP, you're already starting out with an outdated vehicle. It also has the following drawbacks:
- High Monthly Payments - The amount you pay per month is significantly higher than with a PCP or a leasing deal.
- High interest - For those with decent credit scores, you're likely to get a much better interest rate with a personal loan.
- Not your car - You don't actually own the car until the final payment, so you can't modify or sell the car over the contract term (without permission from your finance company).
- Ownership is overrated - Owning a car isn't all sunshine and rainbows. You need to sell it on, which is often infuriating. By the time you own the car, the tech on it will be fairly outdated and you can kiss goodbye to 40% of its original cost. You take the depreciation hit which you don’t need to with other options like PCP or leasing.
OK, if hire purchase isn't for me, what are my other options?
If you've decided Hire Purchase isn't the right option for you, you're not alone. With a higher monthly payment than other options, it's unaffordable for a lot of us.
Not to mention, Brits are going off the concept of "ownership" and just want to drive a decent car that won't leave us freezing to death at the side of the motorway once a month waiting for the AA.
Here's a quick recap of the other most popular way to finance a car:
- PCP - You pay a deposit, pay a monthly fee for the contract term, have a mileage limit, and either hand the car back or pay the balloon payment (typically a couple of grand).
- Personal Loan option - You take a loan from your bank and buy the car outright. Then you make your repayments to your bank. No mileage limit.
- Lease deal - You pay a deposit, pay a monthly fee for the contract duration, and hand the car back. Mileage limit, but a brand new car, and no road tax or MOT (assuming your deal is 3 years or less).
- Lottery - For just £2 you can buy a lottery ticket and put yourself in for a 1 in 258,890,850 chance of a mega-win. Worth a punt...? Yeah, probably not.