What is Hire Purchase (HP)?

Hire Purchase (HP) is a common way of financing a car purchase.
You’ll borrow money from a finance lender, pay a deposit towards the vehicle, and then pay off the remaining amount in equal monthly instalments for the length of the agreement, with interest charged every month. Once you've made all the payments, the car becomes yours.

Hire Purchase allows you to pay for a car in monthly instalments.
You’ll pay a deposit and essentially borrow money from a finance lender to pay for the car, and make monthly repayments over a set period of time – typically two to five years. You won’t own the vehicle until you’ve made the final payments. Instead, you’ll be the car’s keeper and the finance lender will be the legal owner of the car. You’ll need to keep up with payments or it could be taken back by the lender. As the registered keeper of the car, you’re responsible for insurance, servicing and maintenance, but the finance company is the legal owner of the car until the final payment. For that reason, you can’t sell the car without the permission of the finance lender.

Before jumping into an HP agreement, here are some key points to consider:
• You'll own the car outright once you've made all the payments, which may include an “Option to Purchase” fee at the end of the term. • If the car’s value depreciates while you’re paying for it, you may end up paying more than it ends up being worth. • Since you're paying for the full value of the car, HP may be more expensive per month compared to PCP – but you don’t have to save up for a final balloon payment. • Higher interest rates can increase the total cost of borrowing. • HP contracts typically don’t have strict mileage limits or conditions for wear and tear, but you’ll have to keep the car in reasonable condition while you’re its keeper

Monthly payments with HP are often fixed, so you’ll pay the same amount every month until the contract ends. Those payments tend to cover both the cost of the car and any interest, which can make budgeting much simpler.
Several factors can influence the overall cost of an HP agreement, including the size of your deposit, the length of your contract, and the interest rate offered by the lender. For example, paying a larger deposit can make your remaining monthly payments smaller. While longer contracts with more monthly payments, mean you could pay more in interest over time. Explore your options by comparing the interest’s annual percentage rates (APRs) and the total cost of the loan. Always make sure you can keep up with the monthly repayments.

Hire Purchase contracts can last anything between 12 months and five years, with most lasting three to four years. You’d therefore make 36 to 48 payments towards the total cost of your car, excluding the initial deposit.
You may be able to negotiate the length of your contract. Longer contracts tend to charge more interest per month but this can vary depending your credit score and the size of your deposit. Check your contract and ask the finance lender for more details.

Once you've made all the payments, you’ll officially become the owner of the car. Unlike PCP, there's no need for a final balloon payment or decision about what to do with the vehicle.
You may have to pay an ‘Option to Purchase’ fee before you officially own the car. This could be anything from £1 to £200. Always check your contract and make sure you understand the terms and conditions before you sign up.

If you’re worried about missing payments, contact the finance provider immediately. They’ll be able to talk you through your options.
If you miss payments, you could face additional fees, a negative impact on your credit score and potentially repossession of the vehicle. Always seek guidance where you can. Money Helper and Citizen’s Advice can also provide free, impartial advice.

If your financial situation changes or you're considering ending your HP agreement early, understand your options. Early settlement may be possible, but ending the agreement early may incur fees, so ask the lender before you commit to anything.
You normally have the right to cancel an HP plan within 14 days of signing the agreement, though charges may apply after this period. As ever, check your contract and ask the provider any questions to help ensure you know what you’re signing.

You normally cannot transfer a Hire Purchase contract.
Car finance agreements take your individual finances, credit rating and other factors into consideration and so they would not apply to someone else. If someone wants to buy your car, you’d have to settle your HP contract first.

You’ll have a few responsibilities when running a car being financed through Hire Purchase:
• You'll need to insure and tax the car, comprehensive insurance coverage is typically required. • You'll also need to budget for regular servicing and repairs, including routine maintenance. • If the car is over three years old, you’ll need to get the annual MOT. • Some HP contracts may specify that servicing be conducted at authorized servicing centres, especially if your contract is with the manufacturer.

While HP offers the advantage of outright ownership, it may not be the best fit for everyone.
In addition to bank loans and saving up to buy a car in cash, other car finance options available include: • Personal Contract Purchase (PCP) – usually cheaper every month as it only covers the car’s depreciation (but remember you’ll have a balloon payment at the end), with the option to trade-in the car at the end. • Car leasing – if you aren’t fussed about owning the car, leasing is a great way to drive a new car every couple of years. Always check the terms and conditions of a contract, and make sure you can make the monthly payments before you commit.

Hire Purchase can be a great way of paying for a car in instalments and spreading the initial cost, but there are pros and cons.
You should budget properly, making sure you factor in interest rates and other charges.

• Equal monthly payments and fixed interest rates can be easier to budget for
• The deposit you put down is relatively low, normally around 10% • Flexible contract lengths and repayment terms mean you can find a contract length and price that suits you • You don’t need to make a large final payment, like you would with PCP • Buying through HP gives you some extra protection if there’s a problem with the car, as the finance company or retailer are liable – but always check your contract to confirm • You’re unlikely to have mileage restrictions, like you would with PCP

• Monthly payments are generally higher than with other forms of finance, like PCP
• If you leave the contract early, either by paying it off or just walking away, you’ll often have to pay a penalty charge, even if you’re up to date with your payments • If you don’t keep up with payments, the car may be repossessed, and you’ll lose the money you’ve already paid • The car can’t be sold before the final payment, unless you contact the finance company and agree a termination value • You can’t sell or modify the car without permission, until you are the legal owner and all payments have been made

Searching online is a great way to find the latest Hire Purchase car deals, and compare them to find one that suits your budget.
When you’re comparing Hire Purchase deals, consider the total cost of purchasing a car this way. Figures to keep in mind include: • The APR you’ll be paying, which includes the interest and other fees payable • The total cost of credit • The total amount you’ll repay • Look out for optional fees lenders may charge. Try to add up the total cost – low monthly repayments can look good, but they may come with higher interest rates and thus cost you more over the duration of the contract than higher monthly payments with low interest rates would. On the flip side, you also want a monthly cost that is manageable for you. As with anything, it pays to shop around and speak to different dealers, and you may find you can negotiate on price.

Most retailers and dealerships will offer Hire Purchase, and it's also available through banks, credit unions, and online lenders.
Each one will check whether you’re eligible – which means whether they think you’ll pay them back. What they check for may vary, so ask them to be sure, but most will look at your credit score, income and any existing debts, as well as the amount you’re hoping to borrow for the HP agreement.

Yes, when you apply for an HP contract, the lender will perform a credit check. Try to avoid too many applications and checks in a short space of time, as they will appear on your credit file and this can affect your credit rating.
Learn more about credit ratings, and what to do if you have a bad credit rating.

For a standard HP contract, you will need to provide proof of identity, address, and income. The finance provider will guide you through the necessary paperwork.
• Personal details including your full name, date of birth, marital and residential status and full address history for the last three years. • Employment details including the names and addresses of all employers in the last three years, plus job title and proof of salary. If you’re self-employed, you’ll need to provide proof of income – such as accounts. • Bank details including the branch address, sort code and your account number from the last three years. • ID, which could be your driver’s licence, proof of address or proof of income Try to provide as much as you can. Try to arrange your paperwork in advance so that your application goes smoothly.

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