What Is Hire Purchase (HP) Finance?

Found the car you want but don't have the funds to pay for it all at once? You're far from alone. The vast majority of new cars purchased in the UK are bought using some form of financing, along with a good chunk of the used car market. Until personal contract purchase (PCP) deals came along, hire purchase (HP) was the most popular way of spreading the cost of a car. But what is it, and how does it work?

What is hire purchase (HP) finance?

What does HP mean?

Hire purchase basically means you hire the car while you’re paying for it. You then have the option to keep the car at the end of the deal.

How does it work?

You pay a deposit, usually around 10% of the car’s value, then finance the rest and pay it off monthly. You’ll pay interest on the amount financed, usually between four and eight per cent, and monthly payments can be spread over anything from one to five years.

Upfront payments will reduce your monthly amounts and the total amount you end up paying. Paying for the car over a shorter period will also reduce the amount of interest you pay. There are 0% HP deals out there, but for these you’ll often need a deposit of around 50%. Also, 0% deals likely won’t come with the same discounts as deals with interest, so you could end up paying more. Conversely, if you don’t have the cash for a deposit, no-deposit deals are often available (but you’ll pay more interest).

What happens at the end of the deal?

You’ll usually need to pay a small ‘option to purchase’ fee to take legal ownership of the car. This is often around £100 or £200.

What’s good about HP?

With a hire purchase deal, you can drive the car while you’re paying for it, so you can get behind the wheel for a relatively small outlay. You also get to own the car once the deal is complete, which isn’t the case with all finance options. There’s no annual mileage limit, like there can be with other forms of financing, so you can drive it as far as you like without worrying about having to pay any excess fees. Plus, with the debt being secured against the car, HP is often open to people with a poor credit rating.

What’s not so good about HP?

With HP, you don’t own the car until you’ve paid it off, so you can’t sell it within that time. This also means the finance company could repossess the car if you don’t keep up with monthly repayments. Those monthly repayments are higher than with PCP deals, as you’re paying for the entire cost of the car – and PCP deals can often work out cheaper overall, with dealers offering all kinds of incentives in order to tempt buyers.

How is it different from PCP and personal contract hire (PCH)?

Like with PCP and PCH, you make monthly payments while driving the car. But with PCH, you never have the option to own the car – once the deal is up, you hand it back.

PCP and HP both offer the chance to own the car, but with PCP the monthly payments are smaller and the optional final payment much higher – perhaps up to half the value of the car. This is because with PCP deals the dealer estimates the value of the car at the end of the deal, so you’re only paying for the depreciation. With HP, you’re paying for the entire car, so the cost of the car plus interest is simply divided into monthly payments.

Can I buy a used car on HP?

Yes, HP is a popular way to buy a used car. It’s especially common for used cars over five years old to be offered on HP deals, as these are simpler to calculate than PCP when the future value of the car is difficult to gauge.

Can I end an HP deal early?

Thanks to the Consumer Credit Act, if you’ve paid for more than half the car, you can simply hand it back. If you’ve not made it to halfway yet, you’ll have to make up the difference and pay for any damage that exceeds fair wear and tear in order to end the deal early.

Should I go for HP, PCP or PCH?

Do you want to keep the car at the end of the deal? If not, then PCH and PCP will both offer lower monthly payments. Also, you won’t have to worry about the car losing more value than you expected, because the finance company takes that risk. You also won’t have the hassle of selling it yourself when you want a new car.

On the other hand, if you want to keep the vehicle and spread the cost, HP offers an affordable route to car ownership. This way, you won’t have to worry about exceeding any mileage limits or paying for any scratches and scrapes.

Give our handy guide a read outlining the financing options available to you to help you decide between HP or PCP.

How can I find an HP deal?

Hire purchase deals offer a way to get behind the wheel of a car and drive it how you like, with the prize of owning it at the end of the term. Head to our listings to browse available cars to figure out what you could get on an HP deal.

Most HP deals are offered by finance companies working with car manufacturers, but there are plenty of companies out there offering HP, so it’s worth shopping around. Look at how much the deal would cost you with different deposit amounts, term length and monthly payments, and figure out something you’re comfortable with.

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