Is all this car finance terminology giving you a headache? 😩 With several different ways to purchase a car, it can be confusing for first-time car buyers. Some would ask, “is car finance always the same as hire purchase?” It’s easy to assume that there’s only one type of car financing, when in fact, there are a number of different car financing options. And while they are different from each other, the purpose is the same - to allow you to buy the car you want. So let’s take a closer look at hire purchase in terms of car financing and what it actually means.
What is Hire Purchase Car Finance?
Hire Purchase (HP) is a type of car finance that lenders and financial institutions offer individuals who want to purchase a vehicle. When you apply for car finance like HP and the lender approves your application, you will enter into an agreement with them. The agreement allows you to buy a car you want without having to pay the full amount right away.
What happens is that the cost of the car, less any deposit (often around at least 10%) is spread over a few years, and you’ll be paying the car financing company a fixed monthly payment for the term of the HP agreement.
During this time, the lender technically owns the car you’re driving, up until that point when you’ve finished paying back what you owe them. (Although of course the car will be registered to you at the DVLA and you will be responsible for all the running costs and repairs and to insure it. After you’ve settled the last payment to the lender, you will have legal ownership of the vehicle.
How Does Hire Purchase Work?
With hire purchase car finance, you sometimes have to pay a deposit on the vehicle that you plan to buy. Usually, this deposit is at least 10% of the value of the car. You will then pay the rest of the car’s value through monthly payments or instalments for the duration of the hire purchase agreement. You need to prepare for it because you’re going to pay every month for the next three to five years. If you want to check out how much it will cost every month you can use our online calculator.
Hire purchase car financing is often arranged by the dealership. However, there are also brokers and other financial institutions that can make this same arrangement for you. The rate will depend heavily on your credit score. If you have an excellent credit score, then you may get to enjoy lower rates.
Before signing the agreement with the lender, see to it that you’ve read and understood every line and every section of the contract - the small print! If there’s anything that’s not quite clear to you, don’t hesitate to ask the car finance representative to explain it in more detail. They will assist and make it clearer for you so that everything is clearly understood, and so that there won’t be any surprises for you along the way.
Benefits of Car Finance Hire Purchase
Getting a hire purchase car finance comes with plenty of benefits. The primary advantage of this arrangement is you can buy a car you like and drive it home without having to pay the full price upfront. Imagine if you had to pay in cash for such a big purchase. It might dry up your savings and leave you with little to no funds for unexpected expenses or emergencies.
The deposit you need to pay to purchase the car through HP car financing is also relatively low at 10% of the price of your vehicle of choice. You can of course make a bigger deposit if you want to. An HP agreement also has flexible terms when it comes to repayment.
The car finance term could be for one to five years, and you can choose the length of the term according to your financial situation. Of course, if you pay within one year, the monthly repayment will be higher than if you have a term of five years. However, keep in mind that the longer the car finance term, the more you’re going to pay for the interest overall.
As for the interest rates, they’re fixed, so for a set number of months that you’re making repayments, you know exactly how much you’re going to need to set aside to pay the lender. When using the car, an HP agreement usually doesn’t come with mileage limits. You don’t have to worry about paying any penalties for excesses in mileage.
Tips to Get the Best HP Deal
Before you sign any hire purchase car finance agreement, it’s best to check the options you have. Research the annual percentage rate of interest (APR) on the car finance you plan to get. This is calculated in a standard way so is an excellent way to compare like with like. Before you go to a lender, try to search online for the best APRs and who’s offering them. This way, you’ll know that you have found yourself the best possible deal.
When you’re researching the cost of car financing, don’t focus too much on monthly repayments. A very low monthly repayment may sound like a good choice but you need to see the bigger picture. How much will be the overall cost? You may end up paying more than what the car is actually worth. If your financial situation will allow for higher monthly payments for a shorter term, then that’s better for you because you’ll be paying less interest. Consequently, that means a lower overall cost for the vehicle.
Of course, it would also benefit you to compare different lenders and what else they have to offer. Don’t settle for the first one that offers you HP car financing. Read reviews online on what previous clients have to say about them. What were their experiences with this particular lender?
You want a company that responds well, gives a quick decision and is flexible in its approach if your financial situation changes in the future. Get to know as much as you can about the car financing company as you can. Also, prepare any questions that you’d want to ask the lender when you finally apply for the loan.
Carmoola’s Simple Car Financing Process
If you want a convenient process to get car finance, check out Carmoola’s deals. And to see if you can get financing and how much you can borrow, simply download the app. You only have to enter personal details and verify your identity with your driver’s licence. In minutes, you’ll know the result!
Once approved, we'll then issue you with a virtual card, loaded with the funds to go out and negotiate the best deal on the market with any reputable dealership you wish! And if you do want to make changes to your repayments in the future, you can do so with just a few clicks in the app. You are in control!
Our goal at Carmoola is to make it simple for you to understand if you can get the car finance you want! If you have any questions, do reach out to us! We’ll be glad to help you on your way. 👍