What is Car Hire Purchase and is it Right For Me?

Chloe Murphy 10 minutes Published: 26/08/2021

If you're in the majority of people who can't buy a car outright, there are fortunately a number of alternative ways to get your hands on a hot new set of wheels. 

There are loads of car finance deals available to help you out, and though they’re not exciting or fun (and can be frustrating), sometimes it has to be done! 

If you've already done some research and all of this PCP/HP/lease chat has left you screaming SOS. Fear not. We're here to help. 

In this article we’re going to look at one of the most common car finance methods, Car Hire Purchase (HP). We’ll give you the lowdown on what it is, how it works and whether it could be right for you.

If you’re keen to learn about other forms of car finance too, check out our other articles like what is PCP finance, how does car leasing work, and how to get a car loan

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 your payments contribute towards you owning it at the end of your contract.

Hire purchase sits amongst the most common forms of car finance in the UK, which consist of:

  1. Car Hire Purchase
  2. Leasing (also referred to as Personal Contract Hire or Business Contract Hire)
  3. Personal Contract Purchase
  4. Bank Loan

We’ll get around to discussing the other methods later in the article, but here we’re going to focus on number 1 - Car Hire Purchase.

Like we mentioned above, the payments you make throughout your hire term contribute to you owning the car at the end of the term. 

However this means that unlike taking out a personal loan from your bank, you don't actually own the car during the 1-5 year contract term. The car only belongs to you at the end, when you have no more monthly instalments, hence the hire part. 

This means that if something happens and you can't pay the monthly fee, the car could be snatched from your driveway. 

Though this is never an ideal scenario, it means less risk for the finance company, and consequently, a higher chance you’ll be eligible. If you want to own a car outright eventually, but can't get a decent personal loan due to a bad credit rating or other factor, it's worth checking out a hire purchase car finance deal. 

For most car finance options, you're going to need to have a decent credit history, so it’s smart to visit sites like Experian and ClearScore before you apply to check you’re in the green.

How does car hire purchase work?

If it seems like HP finance could be right for you, the process to get a hire purchase car is fairly simple. 

Here's a rundown of how hire purchase works:

  1. You find a car you fancy and that you can afford.
  2. You head to a trusted car dealer and ask about HP finance deals to pay for it. 
  3. You put down the upfront deposit to secure a “loan” against the car. Dealers often ask for around 10% of the car's value. Some dealers offer a deposit contribution on some new cars. 
  4. Pay your monthly payments plus interest for the next (typically) 1-5 years. 

Pay the 'option to purchase' fee at the end of your term (typically £100-£200) and you’re the legal owner of the car!

How are payments calculated?

Ah, yes. Interest. Always lingering around to spoil the party.

With car hire purchase, your 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 representative APR interest, which is typically 4-9%.

If this all sounds a bit complicated, and you’re still trying to work out what car finance is, let's simplify it with a look at some figures: 

Say you want to drive a Seat Ibiza, which costs £14,498 new. If you take out a hire purchase deal 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 - £2,242.08
  • Option to purchase fee - £200
  • Total cost to own the car - £17,190 

Overall, the cost of your car will be £353 a month after the deposit and before the option to purchase fee. 

There shouldn't be any sneaky 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. 

Am I stuck with the car for the full term? 

If things take a turn for the worst and you can’t afford your payments, you do have the option to voluntarily terminate the deal. Though we’d recommend contacting your lender first, this allows you to bail out of the contract early and hand the car back if you've paid at least half of the total amount including interest.

So, if you were to take out a HP for the aforementioned Seat Ibiza, 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. 

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. 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. 

How does this compare to other options? 

If you’re up to speed with car hire purchase finance, but not sure it’s quite right, you’re probably wondering, “What is the best way to finance a car?”

Fortunately, there are a few major alternative financing options to car hire purchase.

Car Leasing (aka Contract Hire)

With a lease, you pay an initial payment called an initial rental, make easy fixed monthly payments, and you hand the car back at the end of the contract period.

Let's take a look on Lease Fetcher for the same Seat Ibiza. Check out these figures for the most basic model:

Contract Term: 48 months (4 years)

Initial Rental: 6 months upfront (£947.46)

Mileage Limit: 8,000 miles

Monthly Payment: £157.91

Total Contract Cost: £8,527.14

Let’s compare the cost to lease a car with the cost of hire purchase in the case of this Seat Ibiza.

Total Lease Cost: £8,527.14

Total Hire Purchase Cost: £17,190 

The lease is cheaper monthly, and therefore overall. Even if you were to take out two of the lease deals in a row, spanning 8 years, it’s still cheaper - £153.72 cheaper to be exact in this scenario.

The age old debate of whether to lease or buy a car stays strong when you consider ownership. You’ll never own the lease car - but maybe you don’t care. With a brand new car every 4 years, you’ll save cash on repairs and maintenance and MOTs. 

If you like a new set of wheels every few years, we’d recommend leasing. If you would prefer to own the car and keep it for the long haul, we recommend car hire purchase - or investigate lease purchase.

Personal Contract Purchase (PCP) 

With PCP, you make a deposit, make monthly payments, and hand back the car or make a massive balloon payment to secure ownership. 

Let’s take a look at the finer details of a PCP deal for the Seat Ibiza:

Contract Term: 48 months (4 years)

Mileage Limit: 8,000 miles

Monthly Payment: £225

Optional Balloon Payment: £6,966.70

Total Cost of PCP Deal (with BP): £18,000.70

Total Cost of PCP Deal (without BP): £11,034

With a PCP deal, the monthly cost is also higher than leasing but lower than hire purchase. To own the car, you have to pay a hefty balloon payment, which takes the total cost higher than hire purchase.

Total PCP Cost (incl. BP): £18,000.70

Total Lease Cost: £8,527.14

Total Hire Purchase Cost: £17,190

Balloon payment or not, this example shows that leasing is often cheaper than both hire purchase and PCP.

Aside from the optional balloon payment, leasing and PCP are pretty similar. If you’re still debating between them, check out our PCP vs lease post.

What are the advantages of hire purchase?

A Hire Purchase agreement is a great car finance choice for those of us who want to own a car. 

Say you want to pick up a new Toyota and run it for the next 20 years - you aren’t bothered about fancy tech and you keep on top of your car maintenance checklist. 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 to the dealership before the end of the agreement, and you won’t be 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 makes 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.

With HP, you're already starting out with an outdated vehicle, and it 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 (yet) - 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, and by the time you own the car, the tech will be fairly outdated and you can kiss goodbye to at least 40% of its original cost. You take the depreciation hit which you don’t need to with other options like PCP or leasing.

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, 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). See our PCP vs HP post for more detail.
  • 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). See our hire purchase vs lease post for more information.
  • Lease Purchase - You pay a deposit, pay a monthly fee for the contract duration, and you have to buy at the end with a balloon payment. See our lease purchase vs hire purchase post for the low-down.
  • 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. 

If you’re still torn between options, the best way to decide is to be fully informed. Or if you're still not convinced on any of them, see our post "Should I get a car on finance?"

We've also compared lease or finance, PCP vs lease, PCP or bank loan, PCP or buying outright, lease purchase vs PCP, lease purchase vs hire purchase, lease vs lease purchase, PCP vs HP vs loan, and PCP vs HP vs lease if you want to explore other options.