Want a new car but don’t have the cash to pay for it upfront? Hire purchase (HP) could be the perfect financing option for you.
Here’s our short guide, covering all the basics of hire purchase, its advantages and disadvantages.
By the end of the article, you should hopefully know whether hire purchase is the right financing option for your personal circumstances.
How does Hire Purchase work?
Hire purchase is probably the simplest form of car financing. It works by breaking down the whole cost of a car into a deposit and then a series of monthly payments. (You’ll also pay interest on the finance.)
When you pay the final instalment, you officially own the car. Simple, right?
(Okay, technically there's often an Option to Purchase fee which is separate from the final instalment but it's usually pretty small.)
- Deposit: Dealers will ask for around 10% of the car’s list price as a deposit.
- Monthly Payments: You pay off the remainder of the car’s value in fixed monthly payments.
Do I own the car?
Unlike buying a car with a personal loan, you won't own the car while you're paying it off.
Instead, with hire purchase, the finance company retains ownership all the way through the deal. Ownership is only transferred over to you when you make the final Option to Purchase fee.
This makes it very easy for the finance company to repossess the car if you fall behind on your payments. If you've repaid less than a third of the total value of the car, they can actually repossess the vehicle without a court order.
It also means you can't sell or modify the car without the permission of the finance company.
What happens at the end of a Hire Purchase contract?
At the end of the hire purchase period, you pay the Option to Purchase fee, which officially transfers ownership from the finance company to you.
After that, the car is yours and it’s up to you what you want to do with it.
Keep it, sell it or ship it to the US for a career in demolition derby. The choice is entirely up to you.
Does Hire Purchase have extra charges?
Hire purchase is one of the simplest car financing methods and doesn't have many hidden or extra charges.
The most common extra charge is an early repayment fee, which kicks in if you decide to pay off a chunk of the finance before it's due.
Finance companies charge an early repayment fee because they have to make up the money they're losing on lost interest.
It's also important to remember that the finance company owns the vehicle right up until you make the final payment. If you miss enough payments, they can repossess your car, leaving you with nothing to show for all the money you've invested.
Is Hire Purchase Right for Me?
If you want to buy a new car but can't afford to buy it outright, hire purchase could be the answer. Hire purchase allows you to break the cost of a new car over several years, turning one large payment into dozens of smaller ones.
However, hire purchase isn't for everyone and it's important you weigh up your options before committing to a multiyear contract.
If you're still weighing up your options, here's our super-condensed list of pros and cons to help you make up your mind.
Benefits of Hire Purchase
- Spread the cost of a new car across several years
- You can get a better car than if you had to pay upfront
- It’s a simple form of finance
- The financing terms are usually fairly flexible
- You own the car once you’ve made all the payments
Drawbacks of Hire Purchase
- Higher monthly payments compared to PCP and PHL
- The finance provider owns the car up until your final payment
- Interest rates are usually higher than standard car loans
- You cannot sell or modify the car without the finance company’s permission
- If you miss enough payments, your creditor can step in and repossess the car