You might think hire purchase was something you used to buy a washing machine in the ‘70s – and you’d be correct. As types of car finance options go, it’s definitely a bit of a dinosaur, having been around since the start of the last century.
In recent years, it’s fallen out of fashion slightly with car buyers as motorists have moved to alternative options like car leasing. It means that a lot of people nowadays have little idea of what Hire Purchase is and how it actually works.
I’m going to attempt to enlighten you. Hold onto your hats, people. We’re about to delve into the exciting world of hire purchase.
What is Hire Purchase?
So, here’s the basics.
Hire Purchase is a type of finance that can be used to rent – and eventually buy – a car.
It’s essentially a secured agreement between you and a finance company that says you’ll hire the car from them, paying them set repayments for the full value of the car (plus interest), each month, for a number of years. Once you’ve completed your repayments, you’ll have the chance to become the owner of the car by paying an ‘Option to Purchase’ fee.
Importantly, the finance company will remain the legal owner of the car until your final repayment, when you’ll be able to pay the ‘Option to Purchase’ fee which will transfer ownership to you.
As you can see, you’re effectively hiring the car at the same time as paying it off. That’s why this type of finance is called hire purchase.
A crucial detail to also bear in mind is that a hire purchase agreement is secured against the car itself. This means that if you’re unlucky enough to miss a couple of payments, you run the risk of having to wave goodbye to the car before it’s even officially yours.
(Before the car is repossessed, you have to be issued with a default notice. After they’ve issued this, they’ll serve a repossession order or apply for one from the court. If you’ve paid less than one third of the value of the car, the finance company can repossess it without needing to get a court’s permission beforehand. But, if you’ve already paid over one third of the value, your car will be classed as ‘protected’ which means that the finance company will have to apply for a court order if they want to repossess the vehicle. In this case, you can often contact the company and try to arrange reduced payments or extra time if you want to continue paying for the car.)
As I mentioned early, whilst you are paying off the repayments, you’ll be the registered keeper of the vehicle but you won’t actually own it. That means that you’re responsible for keeping the car roadworthy, for paying tax and insurance and for sorting out its MOT. The finance company will remain the legal owner until you’ve finished the repayments and you’ve paid the ownership transfer fee. This also means that you won’t be able to sell the car whilst you’re repaying without the company’s permission.
The plus side to all this is that it can be easier to get approved for a hire purchase agreement than other forms of finance – you can thank the way that HP is secured against the car itself for that. As a result, HP is a particularly useful to consider if you’re recovering from a bad credit rating and you’ve been turned down for other types of finance.
Another benefit is that the finance company – and the dealer you bought the car from – will often be partly liable if there’s a problem with the car.
How the process works
As finance processes go, sorting out hire purchase usually isn’t too taxing.
Once you’ve found that perfect car, you’ll have to find a finance company who offers hire purchase. Most car dealers who provide HP will have a preferred finance or they’ll at least be able to point you in the right direction of one.
After you’ve chosen a finance provider, you’ll then pay them a deposit — usually around 10% of the overall cost of the vehicle (although it can be higher) and your repayment plan will be worked out. It’s usually calculated by taking into account things like the retail price of the car itself, the length of the agreement, and the period over which the repayments are spread. Normally, you’ll be able to reduce the length of the agreement and the size of the monthly payments by paying a larger deposit.
With HP, repayments can often be higher compared to other types of car finance like personal contract purchase (abbreviated as PCP) or personal contract hire (abbreviated as PCH and referred to as car leasing) so it pays to do your research before you rush into the first agreement you come across.
From then on, you’ve just got to stick to your monthly repayments. When you pay off the last one, you’ll be given the option of taking full ownership of the car. (As I mentioned earlier, the car remains the property of your finance company until you’ve completed your repayments)
Your rights in a HP agreement
When you take out a HP agreement, you’ll have the right to fixed repayments and a fixed interest for its course, eliminating any nasty surprises when you open your bill for the month. You’ll also be able to drive as far as you want, as, unlike other forms of finance, there usually aren’t any mileage restrictions on hire purchase agreements.
And one of the most attractive things about hire purchase, of course, is the fact that you have the right to cancel it at any time – particularly useful if you can’t afford the payments in the long term.
However, to do this penalty free, you’ll be required to have repaid at least half of the total cost of the car. If you haven’t reached this figure yet, you’ll have to pay the difference between what you’ve paid so far and half of the car’s value.
Your finance company’s rights in a HP agreement
Unsurprisingly, your finance company will wield most of the power in a hire purchase agreement, but that’s to be expected – after all, there’s few things rarer than a free lunch.
The biggest right they hold is the fact that they still technically own the car whilst you’re paying it off. This means that they can repossess it, if you fail to keep up with the repayments. You also won’t be able to sell the car until you’ve come to the end of the agreement.
The company will also have the right to make sure you keep the car taxed, insured and in good condition whilst you’re paying off the repayments.
Advantages of Hire Purchase
So, why might you choose hire purchase over other types of finance? There’s definitely a lot of other types of credit to choose from. Here are the main advantages:
- You can cancel whenever you want (charges obviously might apply though)
- You get to own the car after you’ve finished paying for it
- Monthly payments and interest are fixed at the start of the agreement
- Hire purchase can be a useful option if you have a bad credit score
Disadvantages of Hire Purchase
Life isn’t all sunshine and ice-cream with this type of credit though. To make it even, here are some of the main disadvantages:
- Monthly repayments can be quite expensive compared to other types of borrowing
- You will have to pay half of the car’s value to get out of the contract early (returning the car too)
- You don’t actually own the car until you’ve finished the monthly repayments
- You can’t sell the car very easily until you’ve paid for it in full