What is hire purchase car finance?

When it comes to buying a new or used car, purchasing a vehicle outright can often be quite expensive. For new buyers especially, it can often be much easier to purchase a car using credit, and paying off the cost in monthly instalments.

However, there are numerous car finance options out there, and it can be intimidating trying to understand what each one involves and whether or not a certain finance type is right for you.

One of the most common loan options available for car buyers is known as HP car finance. To help see if hire purchase is the right type of car finance solution for you, we’ve broken down what hire purchase is, its advantages and disadvantages, and how it compares to other finance agreements.

What is HP finance?

In its simplest form, hire purchase finance is a loan option that allows you to pay for a car in monthly instalments, at the end of which you will then become the owner. Think of it as hiring the car until you make your last payment.

With hire purchase finance, you’ll sometimes have to pay an initial deposit based on the car’s overall value, but after that, the only other payments are your monthly instalments.

How does hire purchase work?

Hire purchase can be arranged by a broker that specialises in car finance. Using a broker who works with a number of different lenders allows you to search for the best deals, and keep an eye out for lower interest rates if you want to keep costs down.

One very important thing to know when getting to grips with how hire purchase works is that your lender may require you to pay what is known as an ‘Option to Purchase’ fee at the end of the contract.

This fee is a relatively small amount but must be paid for ownership of the car to be transferred to you. It can vary in price so you should always ask what it will be before agreeing a hire purchase contract, so you can factor it into your budget.

How is hire purchase calculated?

The hire purchase process is kept relatively simple: over the course of your finance agreement, you’ll pay the full value of your chosen vehicle, plus interest, across a pre-agreed period.

As a buyer, you might be asked to put a deposit down on your chosen car. The remaining value of the vehicle, after your deposit amount if applicable, will be repaid in monthly instalments, which can last anywhere between 12-60 months (or 1-5 years) depending on your credit circumstances and individual preference. This is a fixed period with a fixed interest rate.

What are the advantages of hire purchase?

There are many advantages of hire purchase finance, making it a very popular choice with car buyers.

For starters, the flexible repayment terms associated with hire purchase can be the perfect fit if you’re looking to organise your monthly payments.

Its fixed interest rates also mean you’ll never have to pay more than initially calculated, and the lack of any excess mileage charges helps prevent any surprise fees.

What are the disadvantages of hire purchase?

Of course, while there are advantages to using hire purchase, it’s important to highlight the disadvantages as well.

While flexible term lengths are certainly beneficial, particularly long agreements mean you’ll pay more interest in total, even if the interest rate is low. The car is also not considered yours until after the final payment is made.

Monthly repayments can sometimes be higher than those offered with other finance options, such as PCP. Your overall deposit and payment length determines your monthly costs, so, the shorter the payment length, the bigger the monthly payments are likely to be.

Finally, until a third of your loan is paid, the lender can repossess your car without a court order should you fail to meet your financial obligations.

Do I need GAP insurance?

Guaranteed asset protection insurance (often referred to as GAP insurance) is cover you can take out that protects you if your car is written off while on finance.  Essentially, GAP insurance covers the difference in value between the amount you still owe after the damage and your insurance payout.

However, GAP insurance might not always be necessary when buying a car on hire purchase finance. For instance, if you put down a significant deposit, your total remaining repayments are unlikely to exceed the insurance payout.

Hire purchase vs PCP

If you’ve been looking into other forms of car finance, you’ve no doubt come across PCP finance (personal contract purchase). PCP works in a similar way to hire purchase but with a few key differences.

PCP also comes with regular monthly instalments. However, a PCP contract is generally shorter in its term length (usually between 24 and 36 months) and your repayments will only cover the car’s depreciation, plus any interest, rather than overall value.

One advantage PCP does have over hire purchase finance, as a result of payments only covering the vehicle’s deprecation, is that your monthly instalments tend to be lower. However, you don’t own the car once a PCP contract is up. Instead, you’ll need to pay what’s known as a balloon payment to purchase complete ownership of the car.

The cost of balloon payments can be substantial, totalling the remaining value of the car, and if you can’t afford the balloon payment at the end, you’ll have to hand the car back or start a new PCP or HP contract.

Lastly, PCP contracts tend to include mileage restrictions. Going over these will incur fees, as will damaging the car in any way.

When it comes to hire purchase vs PCP, PCP can mean lower monthly repayments, but if you want to own the car at the end of the agreement without a substantial final payment then hire purchase could be the better option for you.

Other things to consider when applying for hire purchase

It’s always important to look for the best deals when choosing between finance options. At Zuto we work with a large panel of lenders to try and find the right agreement to meet your financial situation.

Questions you should be asking include inquiring about potential APR rates, your total repayable amount, the total cost of your credit, and any additional fees you might be required to pay.

On top of these, you should always look into the conditions surrounding a contract’s cooling-off period, and the potential for voluntary termination.

You should never rush into an agreement when looking for car finance. If you feel that you’ve had hire purchase explained but want information on other types of car finance, don’t hesitate to get in touch with the team at Zuto today.

Here at Zuto, we’ve numerous types of finance options you can ask our team about, including car finance for bad credit. Our help and advice section can also help answer any questions you might have, or you can find more articles like this one over at the Zuto blog.