Hire Purchase: Car Finance Jargon Busters

Buying your own car is an exciting time, especially if it’s your first set of wheels. 😃 But what if you don’t have enough cash to buy the car outright? The most common route that many car buyers take is financing a car through a Hire Purchase car finance deal. If it’s the first time you’ve encountered this term, don’t worry. We’ll share with you what you need to know so you can buy a car without having to empty out your savings account. 

What is Hire Purchase Car Finance?

Hire Purchase or HP is a kind of car finance agreement where you can purchase a car and drive it home without paying the full price of the car in one go. Instead, you will pay a set amount every month for a certain number of months, like say, 36 months. As long as you make those monthly payments on time and you complete all the repayments throughout the duration of your contract, the car will be yours when the agreement ends. 

An HP car finance deal is different from a Personal Contract Purchase agreement because PCP deals would require you to pay a final balloon payment if you want to own the car. You don’t have to worry about this with an HP agreement though. While the monthly repayment amount would be higher than PCP, you will take ownership of the vehicle after you’ve made all repayments, and not have to think about a balloon payment. 

How Does Hire Purchase Work?

With a Hire Purchase deal, the cost of the vehicle is split across the deposit you pay at the start of your contract and the monthly payments you’ll make for the duration of your agreement. As mentioned above, there’s no final payment at the end of the contract. The car will be yours once you have paid the last monthly repayment. 

Your repayment amount depends on how much borrow, how much you put down for your deposit on the car, the interest rate,  and the contract length you choose. For example, if you want the most affordable monthly repayment amount, you would have to pay a substantial amount as your deposit. When you pay more upfront, it will decrease the amount you’d have to borrow from the car finance company. Consequently, you will pay less in interest in the long run. 

There’s also another way you can make your monthly repayments more affordable, and that is to choose a longer contract term. Some car finance companies offer up to five to seven years for their HP deals. Since the total amount you borrowed will be divided over more months, this will pull down the monthly repayment amount, making it very affordable for you. However, you should also know that going down this route means you’re borrowing the money for a longer time, and therefore, you’ll be paying more interest overall. 

Hire Purchase vs. Personal Contract Purchase

Whether you’re planning to buy a brand new car or a secondhand vehicle, you can get a Hire Purchase agreement to make the purchase. To cover the full cost of the car, you will need to pay a deposit plus the monthly repayments. Compared to a PCP deal, you will pay less interest with an HP agreement, especially if you choose a shorter contract term. When you’ve made all the monthly repayments and have completed your HP contract, the car is yours and you’re free to modify it, sell it, or part-exchange it for another car. 

Expect the monthly repayment amount to be higher in HP deals than with PCP agreements. It’s because the cost of the vehicle is divided by the number of months of your contract term, and you won’t have to pay a final payment at the end of the agreement. PCP deals are more flexible though. If you don’t want to own the vehicle, you don’t have to pay the balloon payment. Simply return the car and walk away without paying anything else. If you’ve already decided you want the car to be yours, an HP deal is probably the better choice. However, if you’re still uncertain, the flexibility of a PCP agreement could be advantageous to you. 

How to Choose a Hire Purchase Deal?

You would want to spend enough time researching and comparing different Hire Purchase deals from a number of car finance companies in the UK. It’s crucial to find the best deal that suits your needs and financial situation. For example, some lenders offer discounts or low-interest HP deals. Some provide zero-deposit deals and even 0% APR car finance deals where you don’t have to pay interest (usually on brand new cars). 

Whilst there are many seemingly great deals out there, it’s still important to be careful and read all the details of what those lenders are offering. To make a good assessment of different deals, you need to choose the same type of car finance, the same amount for your deposit, and the same term length for your contract. Don’t worry that you have to calculate all this manually. Many car finance companies have car finance calculators where you can get an estimate of the cost of financing a car. Your best guide when comparing deals is to check out the APR - this is calculated in the same way by all lenders and includes all additional fees etc. 

Takeaway

Before taking out any type of car finance, make sure that you’ve fully evaluated your finances. Remember that signing a car finance agreement means you’re legally bound to make repayments for a set number of months. You need to be able to make those repayments on time, otherwise, you might have to pay penalties or worse, the lender could repossess the vehicle. Avoid missing payments because it will show on your credit report and it can make things difficult for you if you need to get another financial product in the future. 

With a Hire Purchase car finance deal, the cost of buying a car is split into the deposit you pay at the start and then affordable monthly repayments after that. It’s a good way to purchase your dream vehicle. Make it a point to use car finance calculators so you’ll have an idea of how much you need to set aside every month for repayments. 👍