If you’re searching around for ideas of the best type of car finance for your new ride, you’ll probably have noticed that there are lots of options available. In the UK, car finance is the most popular way of buying a car, and you will have seen terms such as Hire Purchase, Personal Contract Purchase, Personal Loan or even a Personal Contract Hire.
You may have set your eyes on a Hire Purchase contract, for its flexibility and ease. However, it can be difficult to decipher the technical terms and cut through the jargon - what does a hire purchase contract contain? Let’s find out! 😎
What Is a Hire Purchase Contract?
A Hire Purchase (HP) contract is an agreement between your credit provider and yourself. It involves buying a car over a term of usually 2-5 years and repaying the amount borrowed by paying a set amount every month. You will then own the car once all the payments are made in full, and the ownership of the vehicle has been transferred over to your name.
Your hire purchase agreement may occasionally include a balloon payment at the end of your loan term. This is more commonly associated with Person Contract Payment plans, but is also an element of some HPs. This balloon payment will usually be a sum around the predicted value of the car at the time, (although this depends on the make and model of the car and it's rate of depreciation) so then you won’t legally own the car until you’ve made tat final payment. However, you’ll be able to use the vehicle exclusively throughout the term of your contract. Also bear in mind that you’re not allowed to sell the car until you’ve paid it off entirely.
HP agreements are known as a form of asset finance because they are secured against the car itself. That is why you won’t own the car until you’ve paid the full amount to your lender, (including the potential balloon payment if there is one).
What’s in a Hire Purchase Contract?
Like all types of car finance, it can be difficult to fully understand the terms of your agreement. It all lies within the fine print, and it’s really important to be aware of everything before you sign. Otherwise, you could end up in a somewhat sticky situation! Let’s go through the basics of a hire purchase agreement to avoid any misunderstandings.
How Long Are Hire Purchase Contracts?
Hire purchase contracts usually last anywhere from 2 to 5 years, (although they can be longer or shorter) and the loan’s length will be determined by how low you want your monthly payment amount to be. The longer the loan term, the higher the interest rate, and of course the more interest you will pay over that longer term. That’s why though it seems tempting, it’s not always the best solution to go for the lowest monthly amount.
So if you can comfortably afford to pay a little more each month you will save money overall. You can read through our guide to budgeting for car finance if you need help with that.
Can You End a Hire Purchase Agreement?
You have a statutory right under the Consumer Credit Act to end your contract at any point in the first 14 days and return the car - with no charges.
Once you have paid at least 50% of your loan back, you’ll also be able to end or terminate your hire purchase agreement (this must be in writing) and hand the keys back. But be aware there may be some additional fees or charges.
You’ll be legally liable for paying all of the agreed instalments up until you officially part ways with the lender, so do get in contact with them as soon as possible if you are having difficulties meeting the instalments. If you’ve only paid less than half the value of the car when you terminate the contract, your lender may be entitled to compensation. You will need to ask for an early settlement figure. Always check your hire purchase contract to see what the conditions are as this may vary from lender to lender.
Did you know you can also opt to refinance your car at any point - this will involve getting an early settlement figure first, and then searching for a lender who might be able to offer a better interest rate. The process is quite simple, your new lender will simply pay the quoted early settlement amount direct to your old lender.
When Can Your Lender Repossess Your Car?
If you don’t keep up with timely payments of your monthly amounts, your lender will be able to repossess your car, provided they have a relevant court order to do so. That is unless you’ve paid less than a third of the overall amount, in which case your lender won’t need a court order to repossess your vehicle.
Your car finance provider will send you a pre-possession order with 15 days' notice before your car is repossessed. You can figure out what a third amounts up to by checking out your car finance agreement.
Can You Return a Hire Purchase Car?
The Consumer Credit Act 1974 stipulates that if you have paid over half the total amount of the car, you are allowed to return the car and end the agreement without any consequences. If you haven’t yet paid half of the payments on your contract, you’ll have to pay what’s left until you reach half before you can terminate the hire purchase contract.
Can You Sell a Car on Hire Purchase?
It is absolutely illegal in the UK to sell a car that still has outstanding finance on it. If you want to sell the car, you’ll have to finish paying for it in full and make sure your hire purchase agreement is fully closed off.
If you find yourself in a situation where you purchase a car with outstanding finance, you might still be able to keep the car. That will be if you can prove “good title”, which is when you had absolutely no idea that the car was still under outstanding finance. We have a full article about good title if you need help with that. But of course to avoid this situation it's always better to perform an HPI check before you buy. You can do this online for around £10 or if you are financing through Carmoola we will do that for you for free.
Can I Settle a Hire Purchase Agreement Before the End?
You’re allowed to settle your hire purchase contract whenever you wish throughout its term if you pay the outstanding balance and an additional fee, called Option to Purchase. But remember you may find that your lender charges an early settlement fee - if you think you may want to settle early, it’s best to check out the terms and conditions of your contract with the lender.
What Has to Be in a Hire Purchase Agreement?
If you want to check your hire purchase agreement is valid and legit, make sure it includes:
- A description of the car
- The price of the car
- The total amount of the hire purchase loan (the monthly instalment multiplied by the loan term in number of months)
- The monthly instalment amount
- The balloon payment amount if any
- The date of each instalment payment
- Your correct personal details like name and address
- A paragraph stating that you can terminate the agreement within 14 days, which is known as the cooling-off period.
- “Hire Purchase” stated obviously and clearly throughout the agreement
- Any fees and penalties that may occur
- The APR (Annual Percentage Rate) that is charged
Buying a car through hire purchase has its own set of benefits. It can give you the freedom of driving a car you enjoy, without having to save up for it, and you can get zero deposit deals too (although it's best to put down a deposit if you can as this will reduce the interest you pay). Also generally speaking you own the car once the payments are all completed.
However, if you are looking to lower your monthly repayments, you might want to consider Personal Contract Purchase (PCP). PCPs have lower monthly instalments because you always need to pay the additional balloon payment at the end, before you can own the car. Check out the differences here.
Here at Carmoola, we make car finance easy peasy. You just have to download our app and put your details in - you’ll get an instant decision to know whether or not you’re eligible. If you have any questions, we’re here to help, contact us anytime! 😊