Spreading the cost of purchasing your car
If you’re unable to pay upfront but require a car, then hire purchase is an available option. Although HP car finance is a tried and tested way to buy cars, this doesn’t mean that it’s the kind of deal to suit your needs.
The following guide outlines how hire purchase works, helping you to decide if it’s the right deal for you.
What exactly is hire purchase?
If you’re currently considering buying a used or new car and need to borrow the money to do so - and you want to own the vehicle at the end of the deal - there are three available avenues of finance open to you.
The first is a standard personal loan, with many types offered. The second option is Personal Contract Purchase (PCP), but this isn’t the cheapest method if you’re certain you want ownership of the vehicle. The third and final choice is hire purchase car finance.
Although not as popular a choice as it once was, around a fifth of brand new cars are bought utilising HP. The number of used car hire purchases is considerably more. Although very similar to a personal loan in terms of payment structure, there are two main differences.
As the name might suggest, you hire the car from the finance company over the time period of your contract with the ability to buy the vehicle on completion of the deal. Unlike a loan, while you’re making payments to the finance company, they in fact own the vehicle.
Only on completion of your payments, including the administration fee for the option to purchase, is ownership of the vehicle transferred to you.
The second difference is that the car is collateral for your debt. If you’re unable to pay, the company can repossess the vehicle to assist in paying off your debt.
Although this isn’t a situation you would want to find yourself in, there is a benefit to the car being used as security. As the lender’s risk of offering finance is lower than on an unsecured standard loan, some applicants who wouldn’t be considered for personal loans would be offered HP.
Always compare the annual percentage rate (APR), regardless of whether you’re opting for a standard loan or a hire purchase deal, as this will show you the overall cost of purchasing your vehicle. As long as all the deals you’re currently comparing cover the same amount of time, the deal with the lowest APR is probably your best option.
How does hire purchase work?
Once you’ve tracked down your car of choice, you’ll know exactly how much you need to borrow.
Dealers request 10% of the vehicle’s price and sometimes more. When purchasing a brand new vehicle, several franchised dealers, particularly those linked to manufacturers, offer promotions and these may give you a contribution towards this percentage if you accept one of their deals.
On acceptance, you’ll make monthly fixed payments over a time period of between one and five years. Common APR interest rates are usually between four and eight per cent. There are dealers who offer zero per cent finance, but this is usually kept for customers with a sizeable deposit only. Always bear in mind that should you fail in your commitment to continue your monthly payments, the finance company has the right to claim your vehicle.
Your finance deal is finished, what happens next?
After all your payments are complete, you must pay an option to purchase fee in order to transfer vehicle ownership to you. This will be detailed in your HP agreement, along with the stated cost, which is usually between £100 and £200. It’s worth mentioning this to the dealer if you’re unable to see it in your agreement. They will be able to tell you the specific fee that will be requested.
Don’t forget that up until the moment you make both your final payment and your option to purchase fee, the finance company still owns the vehicle. Before you’ve completed these two payments, it’s illegal for you to sell the car. It’s possible that the finance company you have the HP agreement with may allow you to make a sale of their vehicle if you ask and if the sum it is purchased for can settle the full amount outstanding.
Voluntary termination if you’ve paid half your debt
You can give the car back to the finance company if you’ve completed payments for half of the total debt. This is called voluntary termination. As clause in the Consumer Credit Act enables you to walk away from an HP agreement at an earlier date. To qualify for this, you must have made payments equal to at least half the entire amount owned. You can then end your agreement and give the vehicle back to the finance company.
This clause can be beneficial to you in a Hire Purchase agreement when:
- You don’t require a vehicle any more
- You need to reduce your costs
- You can no longer afford your payments
- You locate another car for a lower price than the total number of payments left on your agreement plus your option to purchase fee
It’s essential that the vehicle is in good condition when you return it or you’ll be liable for any repairs necessary. If you’ve not made half your payments, you’ll be required to pay any deficit to reach the halfway payment point before ending your agreement.
If you choose to terminate your agreement early, make sure you get written confirmation from the finance company or dealer and keep copies for proof against claims you have defaulted.
