Buying a car through hire purchase

Car hire purchase (HP) is a car finance plan. After paying a relatively low deposit, you hire your car with the option to buy it by the end of the contract.

What is 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.

How hire purchase works

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 because you don’t have a good credit score. You can check your credit score for free with:

The loan is secured against the car, which is why you can’t own it until you’ve made your last payment, including paying the Option to Purchase fee.

Make sure you understand the terms and conditions of your loan before signing the contract. For example, once all repayments have been made you pay a final fee, known as the ‘Option to Purchase’ – once you’ve paid this you’ll own the car. This is typically £100–£200, but it does vary so ask how much it will be.

Pros of hire purchase

  • Flexible repayment terms (from one to five years) to help fit in with your monthly budget – but the longer the term the more you’ll pay in interest.
  • Relatively low deposit required (normally 10% of the car’s price).
  • Fixed interest rates so you know exactly what you’re paying every month for the length of the term.
  • Once you’ve paid half the cost of the car, you might be able to return it and not have to make any more payments.
  • If you don’t have a high credit score, it might be easier to get a hire purchase than an unsecured loan, as the car is used as collateral for the loan.
  • It doesn't usually come with milage restrictions.
  • You don’t need to find a large sum to purchase the car like with PCP.

Cons of hire purchase

  • You don’t own the car until you’ve made your final payment, which means if you get into financial difficulties the finance company could take it away.
  • You can’t sell or modify the car over the contract term without getting permission first.
  • Monthly payments are usually higher than for PCP and leasing deals.
  • Your deposit and term length will affect your monthly payments. Your monthly payments are likely to be higher the smaller the deposit is and the shorter the term of the loan.
  • Until you’ve paid a third of the total amount payable, the lender can repossess the car without a court order.
  • It can be an expensive route if you only want a short-term agreement.

Examples of the cost of buying a car through hire purchase

For a car priced at £25,000:

  • deposit: £1,000
  • APR: 6.9%
  • term (length of the contract: 60 months (5 years)
  • monthly payments: £471.74
  • option to purchase fee (the fee so you own the car at the end of the term): £200
  • Total amount payable: £29,504.40

This example is based on figures from CarMoney.co.uk

How to get the best hire purchase deal

There are two main options here:

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

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.

Top tips for getting the best deal

  • Research the APR – the APR is the annual percentage rate of interest on your loan. Before going to a dealer, use a few comparison sites to see what APRs might be available and get an idea of what a good deal for you looks like.
  • Always think of the overall cost – it can be tempting to look at low monthly repayments. But always add up what the total cost will be – higher monthly repayments for fewer months will mean less interest, which could mean a lower cost overall.
  • 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.

Franchised or independent dealership

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 5-10% - 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.

Hire purchase and conditional sale

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. 

Other alternatives to hire purchase

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

What to do if you can’t afford your repayments

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

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