What is Hire Purchase (HP) finance?

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 monthly affordable payments.

If you’ve got your sights set on a new set of wheels, it can make your dreams of hitting the open road more achievable and affordable.

How does it work?

HP finance agreements are usually made between you and a finance provider who agrees to cover the upfront cost of the car. You’ll usually pay an initial deposit - usually 10 - 20% of the car’s total value - and then pay back the remaining balance in monthly payments which include interest.

HP loans are secured against the vehicle, so you won’t be the legal owner of the car until you’ve made all the repayments, and paid the final Option to Purchase fee (typically in the region of £100 - £200). You may not legally own the car until it’s paid off, but you will be the registered keeper, so you’ll be responsible for all the running costs and general maintenance. 

When will I own the car?

You’ll become the car’s legal owner at the very end of your term. When you’ve made all your monthly repayments, you’ll typically need to pay an ‘Option to Purchase’ fee - this is a small amount that covers the admin costs of transferring car ownership over to you. Here at Carmoola, the ‘Option to Purchase' fee is just £1.

Once all your monthly payments and this final fee have been paid, the car will officially be yours. Congratulations!

How does HP compare to other finance options?

The main alternative to HP is Personal Contract purchase, or PCP. It’s similar to HP, but there are some key differences.

With PCP,  you won’t necessarily become the car’s legal owner at the end of your PCP agreement. You have the option to buy it by paying the one-off balloon payment (equivalent to the guaranteed minimum future value, or GMFV), or you can hand the car back to the lender and walk away. Alternatively, you can use any positive equity 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.

How much will it cost me?

Every agreement is tailored to your individual circumstances, credit score, and affordability. But, there are a few things 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.
• Your deposit: If you can offer your old car as part-exchange, or if you’ve saved up a cash deposit, you could reduce the amount you need to borrow, and potentially bring down your monthly repayment amount.
• Your interest rate: The interest rate you’ll be offered depends on lots of things, including your credit score, payment history, and wider UK economic conditions.
• The repayment period: A longer loan term means lower monthly payments, but you could end up paying more in interest over time. HP agreements tend to last between 12 - 60 months.

What are the pros and cons?

Before you enter into any financial contract, it’s important to weigh up the pros and cons. Here’s what you need to consider if you’re thinking about using HP to get behind the wheel of your next car:

Pros

• Your monthly payments will usually be fixed throughout the agreement
• You won’t usually have to agree to an annual mileage restriction
• You’ll become the car’s legal owner at the end of the agreement
• HP finance can be more accessible for people with poor credit history

Cons

• You may need to put down an initial deposit
• You won’t own the car until you’ve made all your loan repayments
• You won’t be able to sell or modify the car during the agreement
• Monthly payments can be higher than other types of car finance like PCP