What is Hire Purchase?

There are several ways to finance a car if you’re not a cash buyer, just like Hire Purchase, also known as HP. Hire Purchase can be used to fund a new or even a used car and is where you will usually pay a deposit upfront and pay the rest of car’s value in equal monthly instalments over a number of years (generally from 1-5 or 12 to 60 months). This will mean that you won’t own your car until the last payment has been made.

How Does Hire Purchase Work?

With this kind of financial agreement, you will normally need to put down a deposit on the car you are willing to buy. The rest of the car’s value is then paid off in instalments, as mentioned above, over a pre-agreed period of time. Here at Perrys we can arrange Hire Purchase car finance and explain the process to you, but make sure to have read all terms and conditions before signing any contract.

Pros of Hire Purchase

Hire Purchase is great for a number of reasons, such as:

• Fixed Monthly Repayments: You will know exactly how much you need to pay on a monthly basis before you enter the financial agreement; thus, you can budget for other expenses around your car payments.

• No Final Large Payment: Differently from Lease Purchase (LP) or Personal Contract Purchase (PCP) agreements, with Hire Purchase you won’t have a large final payment, and once you’ve made that payment, the car will be yours to keep.

• Up to 5 Years to Pay Back: Depending on your circumstances, you will be able to pay your car back in 1 to 5 years (or 12 to 60 months). 

• Repay Early to Save on Interest: Paying your car in instalments comes with interest, however, should you be able to repay your car finance instalments before the end of your term, this will save you some of the interest charge, and you will end up paying less than what was initially envisioned when you entered your agreement.  

• Relatively Low Deposit: To get a car on a HP contract, you will need a deposit which is generally up to 10% of the car’s price, so you won’t have to dip too much in your savings to get a new vehicle

Cons of Hire Purchase

• You Don’t Own the Car Until the Last Payment: As mentioned above, with Hire Purchase, the car you’re paying for won’t effectively be yours until you’ve made the last payment, which is mandatory in this financial agreement, differently from Personal Contract Purchase (PCP) where the final payment is optional.

• You Can’t Modify or Sell Your Car Whilst Being in The Agreement: This is unless you have been granted permission or if there is a clause on your contract that allows so. You also can’t sell your call privately. However, if you have paid half of the amount specified in your agreement, you may be able to return the car to the lender. 

• Your Deposit Will Affect Your Monthly Instalments: Depending on how much you will put down as an initial deposit, this will affect the instalments you will have to pay monthly. The greater the deposit, the lower the monthly repayments are going to be

• Missing or Late Payment May Affect Your Credit Score: Getting car finance itself is subject to one’s credit score. However, even once you’ve entered the financial agreement, should you not be able to pay the instalments or miss an instalment’s deadline, this will negatively affect your credit score and file.

• It’s More Suitable for Long Term Agreements: Hire Purchase is best when repayments are spread over a longer period of time, as this will allow you to make smaller repayment, and once you get to the end of the term, your final payment won’t be huge.

Example of Hire Purchase Offer (at the time of writing)

Here is an example to help you better understand the dynamic of Hire Purchase:

Let’s say that you’re interested in a 2019 Peugeot 108 and would like to purchase it using Hire Purchase over 60 months with a 10.9% A.P.R. and a 5.71% rate of interest. With a £4000 initial deposit, you will be subject to 59 monthly payments of £177.72 and a final payment of £187.72. 

We hope that our article has given you some food for thought in relation to this type of car finance agreement. However, should you have any further questions, please don’t hesitate to contact your closest Perrys, where we’ll be happy to help you with any query.

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