If you’re considering buying a car, you may be wondering if hire purchase could be an option for you. It’s one of the most common methods of paying for a car in the UK because it allows you to spread the cost of ownership over an extended period.
With a hire purchase agreement (also known as an HP agreement), you’ll typically make a deposit and regular payments over a fixed term until the remaining balance has been fulfilled. At the end of the agreement, assuming all payments have been made in full and on time, you’ll own the vehicle outright.
What is hire purchase?
Hire purchase (HP) agreements are a common method of financing the purchase of a new or used car in the UK. With this type of agreement, you typically pay an initial deposit before making regular monthly instalments to cover the remaining cost of the car, plus interest.
The total price of the car is explained to you at the start of the agreement, and you agree to pay this amount over an extended period. Once you’ve made a large final payment and the requirements have been met, you will be given the option to own the car.
For example, if the total cost of a car is £20,000 and the lender applies a 15% interest rate based on your credit score, you might pay a £2,000 deposit and make monthly payments for three years to pay off the remaining £18,000. With this arrangement, you’ll pay around £625 a month, including interest.
Hire purchase agreements can be a flexible and convenient way to pay for a car, particularly for those who may not have the funds to purchase the full cost of a car outright. However, it’s important to carefully consider the terms and conditions of the agreement and ensure you can comfortably afford your monthly payments for the duration of the arrangement.
Unlike some other types of car financing or leasing deals, such as personal contract hire and personal contract purchase, there are no excess mileage fees or restrictions with a hire purchase agreement, and there is a relatively low deposit by comparison.
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How does hire purchase work?
If you’re considering a hire purchase agreement to finance a car purchase, it can be useful to know how the process typically works.
Here are the various steps you can expect when you apply for a hire purchase agreement:
1. Shop around for the best hire purchase deal
It’s important to do your research and compare different hire purchase agreements to find the best deal for your needs. This may involve shopping around and contacting various lenders.
2. Pay an initial deposit towards the vehicle
Once you’ve found the car you want to buy and you have agreed on the price with the lender, you’ll need to pay an initial deposit to secure the vehicle. The lender will likely ask for your personal details, such as your employment status, bank account information, and driving licence history.
3. Start making your monthly payments
After paying the initial deposit, you’ll make regular monthly payments for a pre-agreed period of time. The payments will cover the remaining cost of the car. Remember, interest will also be added to a hire purchase agreement to cover the cost of borrowing.
4. Make your final instalment and decide whether to pay the purchase fee
Once all the payments have been made, you’ll own the car outright. At this point, you may have the option to pay a purchase fee to take legal ownership of the car.
If you decide to become the legal owner of the car, you’ll need to pay between £0 and £100 to cover the cost of transferring ownership of the vehicle to you.
Hire purchase agreements vs conditional sale agreement
Hire purchase agreements and conditional sale agreements are two common methods of financing a car purchase in the UK, but they differ in a few key ways.
We explain the key differences between them here:
Legal ownership
With a hire purchase agreement, you make regular payments over an agreed period. Once all your payments are complete, you’ll have the option to purchase the car outright.
A conditional sale agreement, on the other hand, is similar but with one major difference: ownership is automatic once you’ve paid the final fee.
Flexibility
In general, hire purchase agreements tend to be more flexible than conditional sale agreements because you can end the agreement early and return the car at any point if you can no longer afford the payments.
However, with a conditional sale agreement, you may be required to pay off the full amount if you wish to end the agreement early.
Interest rate
While both hire purchase and conditional sale agreements include interest, it tends to be slightly higher with hire purchase – especially if you’re financing an older car.
However, both options will result in you paying more than if you were to purchase the full cost of the car outright.
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Can you get a car finance deal with a poor credit score?
It can be challenging to secure a car finance deal without a good credit score because many lenders use your credit score as a means of assessing your creditworthiness and determining your interest rate.
However, there are some options available for those with poor credit, such as:
Secured car finance
This involves putting up collateral, such as your home or another asset, to secure the loan. This can make it easier to get approved for a loan with poor credit, but it’s important to carefully consider the risks involved as missing payments can mean you lose the asset.
Guarantor loan
With this type of loan, you’ll need a cosigner with a good credit score to guarantee the loan. This can help you secure a loan with poor credit, but it’s important to ensure you can afford the repayments and that the guarantor understands the various risks involved.
Personal loan from a specialist lender
While personal loans typically require a good credit rating, there are some lenders who specialise in offering loans to those with poor credit. However, these loans may come with higher interest rates and fees to balance the extra risk to the lender.
It’s important to carefully consider the terms and costs of any car finance deal, particularly if you have poor credit. You should also consider improving your credit score before applying for a loan, as this can help you secure a better interest rate and save money over the long term.
Tips for getting the best car finance agreement
If you’re preparing to enter your first hire purchase agreement, it can be difficult to know whether you’re getting a good deal.
Regardless of your circumstances, here are a few tips to keep in mind:
Map out your monthly budget
Before you start shopping for a car, take the time to map out your monthly budget and decide how much you’re willing to spend on a car payment each month. This will help you narrow down your options and ensure you don’t overextend yourself financially.
Shop around for a car dealer
Take the time to shop around and compare independent dealerships near you to find the best deals for your needs. Don’t be afraid to negotiate the car’s price or the terms and conditions of the finance agreement. Most lenders will be happy to work with you to find something that fits within your budget.
Work out the total cost
When comparing car finance agreements, be sure to take into account the overall cost of the car, including any interest, fees, and charges. This will help you determine the total amount you’ll be paying over the life of the loan and whether it’s worth it.
Consider using an online broker
Consider using an online car finance broker to compare deals from multiple lenders and find the best option for your needs. Be sure to carefully read the terms and conditions of any hire purchase agreement before agreeing to anything and signing on the dotted line.
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What happens if I can no longer afford my hire purchase agreement?
Often, people with hire purchase find it difficult to continue making monthly payments for the duration of their arrangement.
If you can no longer afford your hire purchase agreement, your vehicle may be taken off you because the vehicle technically belongs to the lender until fully paid off. The only way to keep it is by keeping up with the monthly repayments or by taking out an alternative loan to pay the remaining balance off.
However, if it’s not possible for you to keep up with your hire purchase payments, then you may need someone to go through the agreement with you to see what level of debt you will be left with if the vehicle is repossessed by the finance company.
For example, if you own a caravan, you may also have site fees and other costs to contend with while the caravan remains on site. You may need to speak to the owners of the site to see what their policy is when you’re struggling with site fees.
Alternatively, if you’ve already paid half of the total cost of the car, you might be able to return it with no remaining payments required. It’s worth noting that, if you go down this route, you won’t receive a refund for any of the money paid.
What will happen to my hire purchase vehicle if I go bankrupt?
If you go bankrupt and your vehicle is part of a hire purchase agreement, there could be a clause in the terms and conditions that states that the hire purchase agreement will be terminated when you enter into a formal insolvency solution.
If this is the case, the hire purchase company will likely contact you about your next steps. In most cases, they will obtain a court order to start the process of repossessing the vehicle. They will then use the money from the sale of the vehicle to repay your debt.
However, you may be able to keep the car if you can prove it is essential (e.g. you need it for school or work or someone in your household needs it because of a disability).
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Conclusion
Hire purchase is one of the many options available for financing a vehicle in the UK. It works by putting down an initial deposit and making regular payments towards the remainder of the purchase price for a fixed period. Once you’ve made your final repayment, you’ll have the option to own the vehicle outright.
It’s a popular way of purchasing both old and new cars as it doesn’t require you to pay the full price upfront and allows you to secure a newer, more reliable model without the large price tag.
Before agreeing on a hire purchase agreement, it’s crucial to do your research and ensure you’re financially prepared for such a long repayment period. Having some savings set aside can come in handy in the event you face unexpected costs or a drop in income and struggle to meet your next monthly payment.
