How does Hire Purchase (HP) finance work?

Hire Purchase – HP for short – is a popular type of car finance that lets you spread the cost of a new or used car into affordable monthly payments.
 
You’ll usually need to put down a deposit upfront and then make fixed monthly repayments (including interest) for one to six years, depending on the terms of your agreement.
 
While HP loans are designed to help you buy a car, they’re secured against the vehicle, meaning you won’t be its legal owner until you’ve made all the repayments. 

How does HP finance work?

HP finance agreements are usually made between you and a finance provider who agrees to cover the upfront cost of your car purchase in return for regular (typically monthly) repayments which include interest. This could be arranged at the car dealership, via an online car finance broker, or directly with a specialist motor finance lender.
 
You might need to put down an initial deposit – usually 10 – 20% of the car’s total value – and then repay the remaining balance in fixed monthly repayments including interest.
 
Throughout the loan term, you’ll be the car’s registered keeper and responsible for all its running costs and general maintenance, but you won’t be its legal owner until all the repayments are made. This also means you can’t sell or modify the car during your agreement.
 
Once you’ve reached the end of the agreement, all the payments are made, and you’ve paid the final Option to Purchase fee (which typically ranges from £100 to £200), congratulations - the car will be all yours!

How is HP different to PCP finance?

Personal Contract Purchase finance – also known as PCP – is a type of car finance that works similarly to HP, but with a few key differences.
 
With PCP, instead of taking out a loan to cover the full cost of your car, you’ll only need to borrow the amount of value the lender thinks the vehicle will lose during the agreement. This is the difference between its purchase price and guaranteed minimum future value (GMFV).
 
You also won’t necessarily become the car’s legal owner at the end of your PCP agreement. Instead, you can choose to buy it by paying the one-off balloon payment (equivalent to the GMFV), hand it back to the lender and walk away, or use any positive equity that you’ve built up as a deposit in a new deal.

 
PCP finance often comes with more restrictions than HP as you may need to agree to a set annual mileage and could face extra charges if the car is damaged beyond standard wear and tear. So, if you’re someone who loves long distance road trips and plans to keep the same car for a while, this might not be the best option for you.

What are the pros and cons of HP finance?

What fees and deposits are included?

When it comes to planning your budget, it’s important to know how much buying a car on finance will really impact your wallet. While different lenders may apply different charges, they should be clear and transparent about any fees from the outset, so that you’ll know exactly where you stand before signing on the dotted line. 

With this type of finance you’ll typically need to pay:

• Initial deposit
• Interest on the loan
• The Option to Purchase admin fee

If you choose to end your agreement early by settling the finance, an additional charge could also apply.

While you won’t be the car’s legal owner during the HP finance term, as its registered keeper, you’ll still be responsible for paying for its upkeep and running costs. This can include:

• Insurance
• Tax
• Fuel
• MOT and service
• General maintenance
• Parking

There may also be fees applied if you breach any of the agreement terms, such as missing payments.

What affects the cost of my HP agreement?

Every agreement is tailored to your individual circumstances, credit score, and affordability but there are several factors that can affect the amount you’ll need to pay each month as well as the total cost of your loan:

The car’s price

The more expensive the car, the more money you’ll need to borrow to buy it. This could mean you end up with higher monthly repayments or a longer loan term. If your credit score could do with some work, choosing a cheaper used car might improve your chances of securing HP finance.

Your deposit

If you already have a set of wheels to offer in part-exchange or you’ve been able to save up a cash deposit, you could reduce the amount you need to borrow and potentially lower your monthly repayment amount.

Your interest rate

Interest is the fee you’ll pay to the lender in return for giving you a loan. The exact interest rate you’ll be offered will depend on a range of factors including your credit score, payment history, and wider UK economic conditions.

The repayment period

While choosing a longer loan term can reduce the amount you’ll need to pay each month, bear in mind that you might end up paying back more in interest over time. Typical repayment periods for Hire Purchase agreements last from 12 - 60 months.

When will I own the car?

You won't take ownership of the car until the very end of your term. When you reach the end of term, you’ll typically need to pay an ‘Option to Purchase’ fee to take ownership of the car. This is a small amount that covers the admin costs associated with transferring car ownership over to you. Here at Carmoola, the 'Option to Purchase' fee is only £1.
 
Once all your monthly payments and this final fee have been paid, you’ll be the car’s legal owner.

What are the different types of HP finance?

Traditional Hire Purchase

A classic or traditional HP agreement lasts up to six years, and you’ll need to make fixed monthly repayments throughout that time. The good news? Once all your payments are made, including the one-off Option to Purchase fee, the car will be all yours.

Balloon Hire Purchase

With balloon hire purchase – also known as lease purchase – your loan only covers part of the total cost of your new car. The remaining balance is known as the balloon payment and will need to be paid once you reach the end of the loan term. You’ll likely benefit from lower monthly repayments with this type of HP finance, but keep in mind that you’ll have a large lump sum to pay or refinance at the end of your agreement.

Deposit Deferral

While 0 deposit HP finance deals are available, deposit deferral loans let you put off paying a percentage of your deposit until the end of the agreement. This might be a good option for you if you don’t have a car to part-exchange or a large savings pot to use as a deposit and might not be eligible for a no deposit loan.