Option to Purchase Fee: Car Finance Jargon Busters

When buying a car, there are several car finance options to choose from. Two of the most popular types of car finance are Hire Purchase and Personal Contract Purchase. For car buyers who plan to own the car by the end of their car finance contract, HP deals are a great option. Once you’ve made all repayments, you only have to pay an option to purchase fee and the car is yours. 

However, for those who are not sure, then PCP deals provide more flexibility. With a PCP you can also own the car, but you need to pay a final balloon payment. You may also choose to return the vehicle to the car finance company and not pay anything else. Here, we’re going to focus more on Hire Purchase agreements, how it works, and what an option to purchase fee is. 

How Does Hire Purchase Work?

A Hire Purchase car finance deal is a way for you to buy a car without paying for the whole cost of the vehicle. You only have to pay a deposit at the start of your contract and then make the repayments every month for the whole duration of your agreement. 

Once you’ve finished paying your monthly instalments, then you can own the car by paying an option to purchase fee. Until such time, the car would not be legally yours, so you cannot modify or sell it. 

How Much to Pay for the Deposit?

As for the deposit you need to pay at the start, you would usually have to prepare about 10% of the car’s value as your deposit. However, if you can pay more, that would be better for you as you’d be borrowing less money and therefore you’ll be paying less for the interest. 

The deposit you’ve paid will then be deducted from the price of the car and you can pay off the remaining amount through monthly instalments that last from 12 months to 60 months or one to five years. The shorter the contract length, the sooner you will own the vehicle. But the longer the contract term, the more affordable your monthly repayments will be. 

You can also get zero deposit deals too, often from specialist finance companies such as ourselves, Carmoola. Find out more about our innovative approach to car finance.

When Will I Own the Car?

Once you’ve finished paying the monthly instalments and your contract with the car finance company has ended, you only have to pay the option to purchase fee and you will then be the owner of the car.  

Make sure that you read through the terms and conditions of your car finance contract carefully before you sign your name on the dotted line. In the contract,  you can find out the details of your arrangement with the car finance company. For example, you’ll know the specifics of the fees you need to pay such as the option to purchase fee - with Carmoola this fee is just £1.

How Much is the Option to Purchase Fee?

Depending on the lender, there might be other payables to settle. If you’re not sure, don’t hesitate to ask your car finance company about it so that you will understand all the details of your car finance contract completely. 

As for the option to purchase fee, the amount typically ranges from £100 to £200. Bear in mind though that this is just an estimate. The final amount still depends on your car finance company. That makes Carmoola finance a good deal - right?

Advantages of Getting an HP Deal

• The contract term for a Hire Purchase agreement is flexible. It can be as short as a year or as long as five years. Some lenders even offer terms as long as seven years. However, the longer the contract term, the more you would have to pay in interest. 
• You don’t have to spend all your savings to buy a car. If you're not opting for a zero deposit deal, you usually only need to prepare at least 10% of the car’s value as your deposit and then pay the monthly instalments diligently. 
• Most Hire Purchase deals have fixed-rate interests so this means the amount you’d have to pay every month won’t fluctuate regardless of the state of the economy. The monthly repayment amount will stay the same throughout your car finance contract. 
• If ever you find yourself experiencing a financial setback, you may end your HP contract early but you would need to have paid at least 50% of the loaned amount. If you do, then you can return the car and you won’t have to make payments anymore. 
• It’s easier for you to get a Hire Purchase deal than an unsecured loan if you don’t have an excellent credit score. This is because the car itself is used as collateral for the amount you’ve borrowed. Remember that if you fail to make payments a number of times, the lender can also repossess the vehicle so they can recoup the money they’ve loaned to you. 
• Another great thing about HP deals is that they usually don’t have any mileage restrictions like other types of car finance. You don’t have to worry about exceeding mileage limits and paying penalties at the end of your contract. 

Points to Note Before Getting an HP Deal

Remember that buying a car is a major financial decision. Thoroughly evaluate your financial situation, and check if you can really afford the repayments first before taking the leap. It’s exciting to have your own set of wheels but you also need to be diligent and committed when it comes to making payments for the monthly instalments. 

Missed payments could mean having to pay late fees and other charges. Numerous missed payments might lead to the car being repossessed or you being issued a county court judgment which can stay on your credit report for up to six years. This can make it difficult for you to secure a loan in the future.   

Takeaway

For a Hire Purchase agreement, you sometimes need to prepare for a deposit, the monthly instalments, and the option to purchase a fee at the end of your contract. Apart from that, you may also want to consider what you might have to pay for other car-related expenses such as tax, fuel, insurance, breakdown cover, and a budget for repairs and maintenance. The more prepared you are with your finances, the better. 👍