How does Hire Purchase (HP) finance work?

Considering financing a car with a Hire Purchase (HP) agreement? Check out our guide to all things HP to help you decide whether it’s the right option for you.
 
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 Hire Purchase finance work?

HP finance agreements are usually made between you and a finance provider who agrees to cover the upfront cost of your new 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!

What is the difference between HP and 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 new or used 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?

When deciding whether HP finance is right for you, it’s worth taking some time to weigh up the advantages and disadvantages of this loan type:

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?

Every HP finance 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 HP 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 do I get ownership of the car?

You won't take ownership of the car until the very end of your finance agreement 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.
 
Once all your monthly payments and this final fee have been paid, you’ll be the car’s legal owner.

Can I end an agreement early?

Whether you’ve unexpectedly lost your job, had a new baby, or adopted a four-legged friend, a change in your circumstances could affect how well your finance agreement suits your budget and lifestyle. If your existing deal isn’t a great fit anymore and you want to end your HP agreement early, don’t panic; you do have options.

14 Day Withdrawal Period

The Consumer Credit Act 1974 is on your side if you have second thoughts about your HP finance agreement. You have a 14-day "cooling-off" period from signing the agreement or receiving a copy of it, whichever is later. This allows you to cancel the agreement and return the car, as long as it hasn’t been damaged or poorly maintained.

Early Settlement

You can choose to end the agreement early and become the car’s legal owner by opting to settle your finance.
 
You can ask your lender for the settlement figure at any time. This is the amount you’ll need to pay to end the loan early and usually includes the remaining payments minus any interest you’ll no longer need to pay. An early settlement charge might also apply. To get a quick estimate of how much you might need to pay to settle your finance agreement while you’re weighing up your options, check out our handy early settlement calculator.
 
Once you’ve settled up, you’ll become the car’s official owner.

Voluntary Termination

Under the Consumer Credit Act 1974, you have the right to voluntarily terminate your car finance agreement once you’ve paid 50% of the amount owed. This includes any interest and additional charges.
 
If you’ve not yet reached the 50% threshold, you can choose to pay the difference.
 
Once you’ve voluntarily terminated the agreement, you can simply hand the car back to the lender and walk away.

It’s worth noting that, while a voluntary termination shouldn’t impact your credit score, it will be recorded - and visible to lenders - on your credit report. As ending a car finance deal early can be more expensive for lenders, they may be more reluctant to lend to you in the future if they see that you’ve exercised your right to voluntary termination more than once or twice.

Refinancing

HP agreements can last up to six years, and we know that a lot can change in that time. Your credit score might have improved, market interest rates may have gone up or down, or increases in the cost-of-living could be squeezing your budget and making it hard for you to keep up with your repayments. 
 
If your loan agreement no longer suits your circumstances, you could explore refinancing. This involves taking out a new finance agreement, usually with a new lender, to pay off your existing loan.
 
Depending on your needs, you may be able to find a loan with a longer term and lower monthly repayments or a deal with a lower interest rate if your credit score has improved over time.

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.

Why choose Carmoola for your HP finance?

No big deal, but we’re changing the game when it comes to car finance.
 
By putting your needs first, we’ve stripped out the confusion so you can cruise through your car finance journey. For us, it’s all about putting you in complete control, making the process as easy as possible, and ensuring we deliver added value, every time. 
 
Forget awkward sales calls and fiddly paperwork; just grab your driving licence, complete our quick application form, and your finance could be sorted in under 10 minutes.   

Disclaimer: This blog provides general information only. You should always check specific agreement details with the lender.