Everything You Need To Know About Hire Purchase Car Finance

Hire purchase is possibly the simplest way of getting a new car, apart from buying it outright. You’ll pay a deposit, then monthly instalments, and at the end of the agreement you’ll own the car outright. If it sounds familiar, that’s because it probably is: hire purchase is how lots of purchases you make on finance work. That new fridge you paid for monthly for a couple of years? Hire purchase. That buy now, pay later sofa? Yep, that was hire purchase, too.

How does hire purchase car finance work?

Hire purchase car finance is a form of credit, because you’re borrowing the money to pay the dealer for the full cost of the car, and then repaying the finance provider in monthly instalments. It’s something you’ll need to apply and be approved for, so you’ll need to meet the finance provider’s criteria. Applying for a hire purchase credit agreement will involve a credit check, as it’s important to the finance provider that you have a history of repaying money you borrow. If you’re thinking about this as a way of financing your car purchase, then taking the time, plenty ahead of when you intend to buy the car, to go through your credit report and taking any actions that will give your credit score a bit of a boost, could help you to get approved when you need it.

With hire purchase, you’ll pay a deposit – usually 10% of the value of the car – and then the rest is divided up into monthly payments over a set amount of time. You’ll normally be able to choose from repayment terms between one and five years. The shorter the repayment term you choose, the higher your monthly payments will be, but the more quickly you’ll be free of the debt. At the end of the repayment period, you’ll own the car outright.

But, that might not be all

When you reach the end of a hire purchase repayment term, you may find that there’s still a final fee to pay. This isn’t like the balloon payment you have to pay with PCP agreements if you want to keep the car – with hire purchase, you own the car when you finish making your monthly payments. The fee you pay is more of an admin fee, and shouldn’t be too expensive. It’ll usually be added into the final payment you make on your agreement.

The details of how much you’ll pay, if anything at all, will be made clear in your hire purchase agreement, so make sure you take the time to read everything carefully and avoid being caught out.

Remember, there’ll be interest payable

There will be interest payable on a hire purchase car finance agreement. Hire purchase is a secured loan, which means that an asset of yours – in this case, your car - is used to give the lender security that they will be able to recover the money you borrowed even if you don’t pay them back. Secured loans usually come with lower interest rates because of this, but they also come with the risk that if you don’t keep up with your payments, the lender could repossess your car.

Hire purchase is a big commitment

All types of car finance are a big commitment, and hire purchase is no different. There’s no option not to keep the car at the end of the agreement with hire purchase; you’re committing to buy the car, and pay for it in full over time.

It’s also worth bearing in mind that the longer the repayment term you choose, the longer it’ll be until you own the car outright, and the more you’ll pay in interest over time. So, if you can afford to make larger monthly payments and have a shorter term, you’ll own your car quicker, and be saving money on the overall cost in the long run.

Can you end a hire purchase agreement early?

If you want to pay your hire purchase agreement off early, then you can. But, you’ll have to pay the total balance still outstanding on the agreement, minus any interest the finance provider deducts.

However, if the reason you want to end the agreement early is because you’re struggling with the payments, and you can’t afford to pay the whole balance off in one go, then there are a few options available. Unfortunately most of them mean you will lose the car.

First and foremost, if you’re struggling to keep up with your car finance payments, you should always speak to the finance provider. They may be able to do something to help make the instalments more affordable for you, so that you can continue to pay them back at a slower rate, and keep the car.

If the finance provider is unable to work anything out with you, then these are the options available:

• If you’ve repaid less than 1/3 of the car’s value then the finance provider can simply repossess the car to recover what you owe to them. That you’ve been unable to repay the credit will be recorded on your credit report and this will affect your ability to borrow money when you need to in the future.
• If you’ve repaid more than 1/3 of the car’s value then the finance provider will need to take legal action in order to repossess the car. It’s possible that they could then also pass the fees they incur for any legal action they seek onto you. It will also be recorded on your credit report that you’ve been unable to repay the credit, and this will affect your ability to borrow money again in the future.
• If you’ve repaid more than 50% of the total finance amount, which includes interest, then you can return the car to the finance provider and end the agreement. You’ll lose the car, but you’ll have settled the agreement in good standing and this will show on your credit report.

How does hire purchase compare to PCP and PCH options?

Hire purchase can be a good choice if you know you want to own the car at the end of your finance agreement. You’ll pay for the entire car over the term of your agreement, so your monthly payments may be higher than other types of car finance, but you will own the car outright at the end. This is unlike PCP, where even though you’ve made monthly payments for a set amount of time, you need to pay a lump sum at the end in order to own the car. It’s also unlike PCH, where you never own the car and pay a set monthly fee to lease it from the provider instead. You can read more about both PCP and PCH in our other guides, to make sure you have all the information you need to decide which type of car finance is the right choice for you.