Hire purchase explained

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If you don’t have the cash to buy a new or used car outright, you may have come across a few different ways you can finance your next car. One option is a hire purchase agreement. To help you make a more informed decision when looking at your car finance options, we’ve answered the question what is a hire purchase agreement and how it compares to other car finance alternatives.

What is hire purchase?

A hire purchase agreement is where you essentially hire a car from a dealership but have the option to buy the car at the end of your contract. You’ll sometimes need to make an initial deposit – around 10% of the car’s value – then you’ll pay for the value of the car in monthly instalments, plus interest. If you want to buy your car at the end of the hire purchase agreement, you’ll usually need to make a final payment – otherwise known as an ‘Option to Purchase’ fee.

This type of finance is secured against the value of the car. This means that you don’t officially own the car until the last payment, including the Option to Purchase fee, is made. It also means that if you stop making your repayments, the dealership can take back the car to recover their costs.

Benefits of hire purchase

If you’re not sure whether hire purchase is the right car finance option for you, here are a few ways you can benefit.

  • You can borrow up to £200,000
  • You can spread the cost of your car over one to five years. Spreading it over a longer term can mean that your monthly repayments are lower, although it will mean you pay back more in interest overall.
  • Rates are fixed for the duration of your contract.
  • As this type of finance is secured against the value of your car, you may be able to find cheaper rates than with an unsecured loan and there may be more options for those with lower credit scores. (However, it’s worth noting that the rate you’re offered for all finance types will be influenced by your credit score and personal circumstances.)
  • You won’t need to pay a balloon payment at the end of your contract like with Personal Contract Purchase (PCP).
  • If you don’t want to keep your car at the end of your contract, you may have the option to part exchange it for a new one.  What’s more, once you’ve paid half of your costs, you usually also have the option to return your car and end your agreement (if you want to).

Considerations with hire purchase

As with all types of car finance, there are some potential drawbacks you’ll need to consider before making your decision.

  • You don’t own your car until the end of your hire purchase agreement and all the payments are made. This means your car could be taken away from you if you are suddenly unable to make your repayments.
  • You can’t sell or modify the car without permission first.
  • Hire purchase agreements are only an option if you’re buying a new or used car from a dealership. You won’t be able to use this type of finance if you want to buy your car privately.
  • You’ll need to pay a deposit at the start of your contract.
  • Monthly repayments may be higher than other types of finance, such as PCP or leasing, but these may be less suitable if you’re intending to keep your car at the end of your contract.

Hire purchase and conditional sale

With a hire purchase agreement, you’ll have the option to hand the car back to the dealership at the end of your contract. With conditional sale, there is no option to do this. You’ll simply become the legal owner of the vehicle once all your payments have been made.

If you’re looking to buy a car with finance, it’s always best to do your research to work out which option is right for you. To check your hire purchase and personal car loan options with our panel of 40 UK lenders, you can use our quick eligibility check now and it won’t harm your credit score.