Buying on hire purchase

Hire purchase is a straightforward finance option for those buying a new or used car, who are working on a budget. At Lookers, we offer hire purchase agreements as part of our range of flexible finance options.

Below you’ll find hire purchase explained in full, including its advantages, disadvantages and a full breakdown of what it involves.

What is hire purchase? 

Hire purchase is a way of paying for a new or used vehicle. You’ll pay an agreed deposit that is agreed beforehand, then pay off the remaining value of the vehicle in monthly instalments – these will also be set in advance.

Essentially, you are paying off a loan that is secured against the vehicle you’re buying and won’t own the car until all your monthly payments are made. In short, you’re hiring the vehicle for a contracted amount of time, then you’ll have the choice to buy or return it to the dealership once this time is up.

How does hire purchase work? 

What happens when the hire purchase contract starts? 

When you buy a car on hire purchase, you’ll start by agreeing on the amount you want to borrow. This is typically based on the total price of the vehicle, minus any deposit required.

You’ll undergo a consultation with the dealership, who’ll run through the agreement and discuss any alternative financing options with you. They may be able to provide details about any promotions running that could contribute to your deposit.

Keep in mind that you may also be able to part-exchange your old car, to help cover this deposit. The amount that you could receive will depend on the existing value of your car.

Once the final loan amount is finalised, the dealership will contact the finance company or broker, before completing a hire purchase application based on this amount. You’ll then pay the deposit and begin making your monthly payments on the agreed start date.

What happens when the hire purchase contract ends? 

The hire purchase contract ends once all repayments have been made and the agreed sum has been paid in full. You’ll then be given the choice to return the vehicle to the dealership or purchase the car, becoming the outright owner.

If you decide that you want to keep your vehicle, you may have to pay an ‘Option to Purchase’ fee. This covers admin costs to the finance company for transferring ownership over to you and the amount varies depending on the company, vehicle and dealership.

Keep in mind that if you agreed to a conditional sale hire purchase agreement, ownership passes to the buyer automatically, as soon as the loan is fully repaid.

A hire purchase example 

Here is a hire purchase example to give you an idea of how a typical agreement works in practice:

Person A decides to buy a vehicle on HP that costs £18,000.
They agree to pay a 10% deposit, which is £1,800.
This leaves £16,200 left to pay.
Person A chooses to borrow this amount over four years.
Their repayment rate is set at 5% APR, making the total payable amount £17,868.49.
This means their monthly repayments would be set at £372.26.

It’s worth noting that this sum doesn’t include the Option to Purchase fee you’ll need to pay in order to take ownership of the vehicle at the end of your contract, should you so wish.

Why buy a car on hire purchase? 

Before you decide if a hire purchase contract is right for you, it’s helpful to know the pros and cons first.

What are the advantages of buying a car on hire purchase? 

Choosing to hire purchase your next car offers a number of advantages. These include:

Makes budgeting easier, as you have a set monthly payment to make.
Allows you to spread the cost of buying a new or used car.
Quick and easy to arrange in the car dealership.
Credit agreements are regulated by law, which means your payments are protected and secure.
Flexible with a choice of payment terms, typically between 12 and 60 months.
A low deposit can be paid at the start of the agreement.
As the car is used to secure the debt, hire purchase car finance could be easier to get, compared to a standard loan – particularly for those with poor credit.

What are the disadvantages of buying a car on hire purchase? 

HP isn’t for everyone and there may be other flexible finance options that could work better for you. Here are some worthwhile considerations to make:

Monthly payments are usually higher than if you’d have taken out a personal loan.
You can’t claim ownership of the vehicle until you’ve paid the full sum.
As you don’t have outright ownership, you can’t customise, sell or modify the car in any way, unless you get permission from the finance company.
Failure to keep up with payments may result in the vehicle being repossessed.
You can’t transfer ownership of the vehicle until you take ownership of it at the end of your contract.

Frequently asked questions

What is the difference between hire purchase and leasing?

When you lease a car, you don’t own it and will give it back to the dealership once your contract is finished. You won’t have to pay a deposit, either.

On the other hand, a hire purchase gives you the option of taking ownership of the vehicle at the end of the contract and you have to provide a deposit.

Can I pay off hire purchase early?

If you wish to settle a hire purchase agreement before the end of the contract, then you are entitled to make early repayments to your finance company.

Get in touch with them directly for advice on how best to do this.

Is hire purchase better than getting a loan?

This depends on your circumstances, as there’s no one-size-fits-all finance option. Hire purchase is highly flexible, convenient and easy to organise, offering you the choice to take or return the vehicle at the end of your term.

It’s also a great choice for those who have a bad credit history and may otherwise not be offered a loan. However, it’s worth noting that you do still need to have a good credit rating, in order to have a better chance of a lower interest rate.

What are the hire purchase alternatives?

There are several other car financing options on the market, including:

• Leasing
• Personal contract hire
• Personal contract purchase
• Personal loan

For more information about our flexible financing options, contact our team.

Is buying a car on hire purchase expensive?

Your hire purchase contract will be tailored to your specific needs, including the amount you pay monthly and how long you have to pay this off.
It’s also important to remember that hire purchase payments are usually more expensive than PCP or leasing deals, depending on your circumstances, vehicle and agreement.

How long does a hire purchase contract last?

You’ll be offered a choice of payment terms, including how long you have to pay off your hire purchase. Typically, this is between 12 and 60 months, which equates to one to five years. This ensures you can work around your monthly budget.

Can hire purchase agreements be transferred?

No, you cannot transfer your hire purchase contract to another person. You’ll have to wait until you’ve gained outright ownership of the vehicle, before you can sell it on or gift it to another person.

If you’re struggling to make your monthly payments, get in touch with your financing company or contact us to have a discussion about your options.

What are the main things to remember about hire purchase?

As the car is not owned until the end of the term you cannot sell or modify it without first seeking the permission of the finance company. Under the Conditional Sale agreement, ownership of the car will automatically transfer once the final repayment is made.

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