Buying a car through hire purchase

Hire purchase is a way to finance buying a new or used car. You (usually) pay a deposit and pay off the value of the car in monthly instalments, with the loan secured against the car.

This means you don’t own the vehicle until the last payment is made.

Usually, you’ll first need to put down a deposit on the car you want to buy. For most hire purchase agreements this will be 10% or more of the vehicle’s value.

The rest of the value of the car will then be paid off in instalments over a period of 12 to 60 months (one to five years).

Hire purchase is arranged by the car dealer, but brokers also offer this service. The rates are often very competitive for new cars, but less so for used cars. For second-hand cars the annual percentage rate can vary from 4%–8%. The lower the number the better.

The rate could be higher for example beacuse you don’t have a good credit score. See our guide How to improve your credit score for more information and how to check your reports for free. 

The loan is secured against the car. This means you only own the car after you’ve:

• made all the repayments, and

• paid a final ‘Option to Purchase’ fee – typically £100 to £200.

We also recommend that you check if there are any additional fees and charges on your loan.

To help you work out how much a loan will cost, use the Money Saving expert loan calculatorOpens in a new window

There are three main options here:

• getting the finance through the dealership you’re buying the car from
• getting finance through an online broker
• getting finance through your bank.

It’s useful to search online first so you’re armed with some numbers to haggle with in dealerships. Offers can vary significantly online and in dealerships so getting more than one quote is essential.

To help you compare the different offers, ask for:

• the APR you’ll be paying
• the total amount repayable
• the total cost of credit
• any additional fees.

To help you find and shop around for the best HP deal, we suggest either of the following two sites: 

• Money Saving Expert Opens in a new window
• The Car ExpertOpens in a new window 
  

• Try different dealers – every dealer, even from the same manufacturer, can offer different deals. If you’re not getting an attractive price, you can go to a different dealer and try again there.
• Haggle – it’s not just the car price, but also the APR you can haggle over. With lower interest you get reductions of hundreds or even thousands of pounds over the life of the hire purchase. It’s also possible to haggle over deposits and fees.
• Don’t rush – you don’t need to settle for the first offer you get, and if you’re given a contract, make sure to take your time and read it all through and the terms and conditions.
• Use a credit card - consider paying part of the cost on a credit card. Many dealers won’t allow you to, so check with them. Paying just 1p of the deposit with a credit card gets you valuable protection under Section 75: credit card payment protection.
  
• Mind the gap – consider any extras carefully. For example, gap insurance is designed to cover the difference between the amount your car insurer would pay out if your car was stolen, or written off, and the price you paid for your car. Find out more on the Which? websiteOpens in a new window

When you buy a car, you’re likely to go to either an independent dealership (one run by a business and will stock vehicles from many brands) or a franchised (one working with a manufacturer, like Ford or Volkswagen).

Independent dealers will have a wider choice of cars, as it’s much easier for them to stock different manufacturers. You’ll also find mostly second-hand cars, which means typically vehicles are cheaper.

You won’t normally be able to find 0% finance deals or large deposit contribution deals, and APR will be around 5-20% - although you credit record will affect the rate you’ll be able to get.

Franchised dealers are the place to go for a new car – although remember new cars lose their value due to depreciation very quickly.

Franchises can also offer very competitive deals like 0% finance or contributions of between £500-£2,000 to a car deposit. These deals are more common on new cars, but you’ll also need a very good credit rating to quality for the best deals.

Conditional sale is similar to hire purchase but you’ll own the car at the end of a conditional sale agreement. There is no ‘Option to Purchase’ fee payable, like there is with a hire purchase, so you’ll automatically become the vehicle owner once you’ve made all your repayments to your lender.

You usually don’t own the car until you’ve paid the final instalment, and the lender might be able to take back the car if you fall behind with payments. 

There are many ways to buy a car, from using cash by saving up, getting a bank loan, or using other means of finance.

If you’re struggling to meet your car finance repayments, there are some options available to you.