What Is Hire Purchase?

When it comes time to buying a car you are offered a lot of different options to pay for it. One of the methods that had been around the longest is Hire Purchase. It is a way to spread the cost over your car over time. Around 20% of vehicles are bought this way. Before you decide if Hire Purchase is the right option for you here are the key points.

What Exactly Is Hire Purchase?

As the name suggests, Hire Purchase is a system where you essentially hire the car and then have the option to buy it at the end of the term. This means that until you make your final payment, the finance company owns the car. Only when the last payment is made do you own the vehicle. This means that the car is used to secure the loan. If you miss a payment, the finance company can repossess the vehicle.

Tip: If you choose this option, you can’t sell the car until you have paid the final payment. So choose your finance period with care.

How Does Hire Purchase Work?

You make a deposit to secure the car, usually around 10%, but it can vary. The finance company agrees a time period with you, to pay the remaining cost of the car. Remember that you will also be paying interest on this amount. You then make monthly payments for the agreed time. At the end of the period, you pay a final fee and take ownership of the car.

Example

If you are buying a car that costs £15,000 and agree a three-year term with 5% APR and a £200 final purchase fee.

You pay an initial deposit of 10% – £1,500

You make monthly payments of £403.93, over three years – £14,541.48

Then make a final payment of £200 to take ownership of the car.

You will pay a total of £16,241.48

Tip: Dealers will often offer low or 0% APR agreements, however, to be eligible for these you may need to make a much larger initial deposit.

What If You Want To Get Out Of The Agreement Early?

If you find that you no longer need the car, or you just can’t afford it anymore, then there is a way to get out of the agreement before the end of the term. If you have paid off half of the original loan then you can return the car at the end of the agreement. If you haven’t yet paid off half the amount but still need to return the car, you will have to pay off the remaining amount to reach the halfway point.

To leave the contract early, you should make sure that the car is in good repair. If there are any maintenance or repair costs linked to the vehicle, you will be expected to pay those.

Tip: If you do leave the agreement early make sure to keep all the paperwork, so you can prove you haven’t just defaulted on the loan.

What Are The Benefits Of Hire Purchase?

  • The terms are often highly flexible. You can choose a deposit and repayment term to suit you.
  • Some dealers will make a contribution to your deposit if you opt for Hire Purchase.
  • There are some 0% APR deals out there.
  • The cost of the car is spread out, so you don’t need the whole amount upfront.
  • As the loan is secured against the car, you might be eligible for Hire Purchase even if you have been declined for other types of loan.
  • If the car is faulty, it is the finance company’s responsibility to fix it.

Tip: The rate you are offered will depend on your credit score, the better you score, the lower the rate.

What Are The Negatives Of Hire Purchase?

  • You don’t own the car until the end, so you can’t sell it before the term expires.
  • The monthly payments and APR are often higher than other finance options.
  • You can’t make any modifications to the car until the end of the term.
  • If you miss a payment, the finance company can take your car.

Tip: Some online companies offer Hire Purchase deals, which may be better for you than getting it through the dealership.

Is Hire Purchase Right For You?

Hire purchase is, in most cases, the more expensive finance option. However, it is the right choice in a number of situations.

If you have a poor credit score and would be unable to get a standard car loan, then Hire Purchase is a good alternative. This is because the car is the security for the loan. The finance company don’t do as deep of a credit check because there is less risk for them.

If you can get a 0% deal, then Hire Purchase becomes a good choice. You can generally only get these deals if you have a large deposit. But this can allow you to spread the cost a little without paying for the credit.

If you are likely to want to change your car sooner than the agreed term then this is not a good choice. You might end up paying more to get out of the contract and be left with nothing to show for it.

Tip: Making payments towards your Hire Purchase agreement will have a positive impact on your credit score.

 

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James Hogg

James Hogg is an author and scottish car fanatic writing exclusively for Slainte.co.uk knowledge library guides. He has a passion for driving fast motorcars and also enjoys riding motorbikes at the weekends and on track days. James is also a contributor and author to the Slainte car finance pages.

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