Hire Purchase (HP)
How does hire purchase work?
Customers put down an initial deposit and then make monthly payments for a fixed period – typically two or three years – at the end of which they become the legal owner of the car. Transfer of ownership may require a relatively small fee, of £100 to £200, at this point.
The more deposit you put down on a hire-purchase deal, the lower your monthly payments are and vice-versa. With hire purchase, it may also be possible to become owner of the car earlier than agreed by making a lump-sum payment for the remainder of the loan.
Who offers hire-purchase deals?
Hire-purchase agreements tend to be available from car dealers and manufacturers, and are commonly offered on used as well as new cars.
What are the advantages of hire purchase?
Hire-purchase deals allow motorists to spread the cost of buying a vehicle rather than having to find all the cash up front. The risk for a dealer or manufacturer in offering hire purchase is mitigated to some extent by the fact that they can repossess the vehicle if the borrower can no longer make their monthly repayments: because the loan is secured against the car, this means that interest rates can be lower and that people with poor credit records have a better chance of being able to sign up for such a deal.
Unlike with PCP deals, hire purchase does not require a large final payment to be made to become owner of the car. And hire-purchase agreements do not tend to impose annual mileage restrictions in the way that PCP or leasing deals do.
What are the potential risks involved?
As mentioned above, failure to keep up with monthly repayments means that the vehicle can be repossessed, as it is used by the finance provider to secure the loan. You do not own the car until the final instalment – plus any final transfer fee – has been paid.
In addition, hire-purchase customers bear more of the risk of depreciation than with PCP: if the vehicle’s value depreciates faster than expected, the customer will still have to continue making the pre-agreed monthly payments and ultimately take ownership of the car. With PCP, taking ownership of the car at the end of the loan term is optional.