What is Hire Purchase (HP)?
Car financing options can vary drastically from buyer to buyer. Very few people are lucky enough to be able to buy a car outright with a single lump sum.
Instead, most people will choose a financing option to fund their new car. This can involve trading in an existing car, securing a personal loan to cover the cost of the car, using dealer finance or leasing the car.
You can see some of the options available in our guide to paying for your car, but here we’re focusing on one of the simplest and most popular ways to pay for your new car; hire purchase.
What is hire purchase?
Hire purchase (or HP) is a simple form of paying for a new car. It involves paying a certain monthly amount over a fixed period of time until the car is paid off. In this way, it is a mix between a loan and a lease.
The monthly amount will be the total value of the car plus interest divided over the length of the hire purchase agreement.
This can be reduced with a deposit and the monthly payment will depend on the value of the car and the length of the contract.
Usually, however, a hire purchase agreement is anything between two and five years, often with a fee at the end of the agreement to buy the car outright.
This is similar to other forms of finance such as a loan or credit card, however there is one major difference.
Until the car is paid off in full, the person who has taken out the hire purchase option does not own the car. This means the car cannot be sold without the lenders permission during the contract.
Benefits of hire purchase?
The benefits of hire purchase are obvious. It allows a customer to spread the cost of payment over a long period of time to reduce the monthly cost.
This allows the buyer to purchase a car they may not have been able to afford if they had to pay for it outright, and it avoids often expensive dealer finance and the hassle of securing a bank loan or credit card.
Buying a car using hire purchase also allows you to trade in an older car or place a larger deposit to reduce monthly payments, and the set monthly fee allows the buyer to plan ahead and budget for the car in advance.
It is also flexible, offering payments within one to five years typically meaning a new car purchase can be designed to suit most needs.
Another huge advantage is the lack of a mileage limit. Many leasing deals come with a set mileage limit and repayments will increase if the driver goes over this.
For heavy users of the car, hire purchase could be the answer because, as the car is being paid for to own outright at the end of the contract, there are no mileage limits at all.
Finally, the main benefit of hire purchase is the fact that one the contract is over and all payments have been made, the buyer will own the car outright and can modify or sell it at their leisure.
Disadvantages of hire purchase?
The main disadvantage of hire purchase is the fact the car is owned by the company the agreement is signed with until the last payment is made.
This means the buyer cannot modify or sell the car for the duration of the contract, despite being liable for any damages or repairs.
It also means the company has the right to take back the car if a repayment is missed. This leads to a common form of car scam, when a buyer is sold a car with outstanding payments, leaving the buyer out of pocket when the hire purchase company collects the car.
Finally, if you decide during the contract you wish to terminate it, the fee to do so can often be very high.
Hire purchase vs personal loan?
Hire purchase is secured i.e. the car is owned by the company and as a result if a payment is missed, the car is simply taken back.
In contrast, a personal loan is often secured against a house, making the risks of missing payments much larger.
It is also easier to agree on a hire purchase contract than a personal loan because often a dealership or manufacturer will offer you the choice of a hire purchase option when the car is bought.
This is in contrast to a personal loan, which must be agreed with the bank before purchasing a car. However, the advantage of a personal loan is that the buyer owns the car instantly and can sell it whenever they wish.
Monthly payments for a hire purchase deal are often higher than other forms of finance, but the final amount paid to own the car is often lower overall.
Remember many dealerships will try to encourage a buyer to choose higher rates to earn commission, so it is worth looking for the best deal and negotiating wherever possible.
However, it is still a good idea to choose a reputable dealership such as Perrys. At Perrys, expert sales staff at each dealership have years of experience advising valued customers throughout the entire car purchasing and after care process and pride themselves on giving first class customer care.
Unlike some forms of finance, hire purchase does not take into account residual values, instead taking into account the retail price of the car, the size of the deposit and the interest rate agreed.
This means the cost of depreciation is taken on by the buyer and any loss in value will be lost by the buyer when they sell the car on.
This is a problem shared by somebody who has bought the car outright, and means any car bought on hire purchase should be checked to see its predicted residual value before purchasing if the intention is to sell it on at some point in the future.