Understanding Your Hire Purchase Agreement

So, you've just passed your test and are now in the market for your first motor. How exciting! Hold on, though, what's all this talk about contracts, lenders and credit? And who knew that buying a car could be so confusing? 😫 All of the finance jargon involved is enough to make anyone's head spin - even more so if you're a first-time buyer. But don't worry, because Carmoola will have you up to speed in no time. To help you out, we've compiled some key information that will help you to better understand your Hire Purchase agreement. Let's dive in, shall we?

What Is Hire Purchase and How Does It Work?

Often abbreviated to HP, Hire Purchase is a popular financing method that allows you to spread the cost of buying a car over a period of months or years, meaning you won't have to foot the entire bill upfront.

Instead, you will usually be asked to pay a deposit (normally, this amounts to around 10% of the total vehicle cost), followed by fixed monthly instalments that will end when the agreed payment term is complete.

The larger your deposit, the less you'll have to pay per month to your lender. However, if you can't afford to put down a hefty deposit, you can reduce your costs by choosing to take on a longer contract. Although, you should note that longer contracts are more likely to charge a higher interest rate and could cost you more in the long run.

Another important thing to know is that the terms of your HP agreement are only valid for 30 days from the date of your soft credit check. If you decide against buying the car within that time frame, you will have to start your application over.

Find out more about how hire purchase works

How Long Do Hire Purchase Contracts Last?

On average, Hire Purchase agreements last between 12 months and 5 years, with most people opting for a 3-year contract. This would entail making 36 additional payments to your lender after the initial deposit.

Having the freedom to negotiate your contract length ensures you get the most suitable HP agreement for you. But contract length isn't the only thing that determines the cost of your repayments. What you will be asked to pay also depends on the size of your deposit, credit rating and the lender themselves, which is why it's crucial to do your research before reaching a final decision.

How Are Hire Purchase Payments Calculated?

This might come as a surprise, but calculating HP payments is a very simple process. All you have to do is:

Subtract the deposit amount from the total price to pay (remember to add the interest rate).
Divide the remaining cost by the total number of payments you will be making.

For example, let's say you're buying a car that costs £10,000, and you have saved up a deposit of £1,000 (10%). That reduces the remaining cost to £9,000. If you opted for a 3-year HP plan, this would make your monthly repayments approximately £250, plus interest.

You'll also have to take out fully comprehensive car insurance and ensure that the car holds a valid MOT at all times. So make sure you factor these additional costs into your budget each month.

To work out how much you could pay per month with Carmoola, feel free to check out our online calculator for an instant quote.

Hire Purchase Charges and Fees

In addition to your scheduled monthly payment plan, there are some circumstances where you may be faced with unexpected charges and fees. These will differ from person to person but can include:

Documentation Fees - This is a charge for setting up your finance agreement.
Penalty Fees -If you are late in making a payment or miss it completely, you could be charged extra. With Carmoola, this charge is £15 for every late payment. We may also report these missed payments to credit reference agencies. This could make getting credit difficult and more expensive for you in the future.
Interest Surcharge - If you fail to make a payment on time, your lender might increase the overall interest amount that you have to pay.
Rescheduling Charge - If you want to change the terms of your loan, and your lender agrees, you could be asked to pay a one-time fee.

Can I Buy A Second-Hand Car On HP?

People often wonder if HP is available for second-hand motors, and the answer is yes - absolutely! In fact, Hire Purchase is probably the most common type of finance you will be offered when purchasing a used vehicle as it means the finance company won't have to gauge the future value of your car, which becomes increasingly difficult as motors age.

It can also be more convenient for you if you plan to keep the car long term. This is because with Hire Purchase, the overall interest rate is usually lower than that offered by a PCP deal, and the monthly payments you make to your lender will cover the total value of the car.

Read about buying a second hand car on finance

Will I Own The Car At The End Of A HP Contract?

Yes! Provided you stay on top of your monthly payments, the car will be completely yours when your contract ends and you have paid the option to purchase fee. The great new is that this is only £1 with Carmoola! After that, it's up to you what you do with the car: you can keep it, trade it in for a new set of wheels or else sell it on - the choice is yours.

This is where HP and PCP differ significantly. With the latter, you would still have to pay a hefty fee in order to assume full ownership of the car after the final monthly payment has been made. This is known as an optional final payment.

So, while you will be the one named as the keeper of the vehicle on the logbook (V5C document), up until that last payment, a vehicle on Hire Purchase still belongs to the lender. This means you can't modify the motor in any way without breaching the rules of your contract. So, no pink paint jobs, tinted windows or adding flashy spoilers until that final payment goes through, got it? 😉

Seriously, though, it's essential that you keep the car in tip-top condition. You also won't be allowed to sell it without permission from the company your agreement is with. And, if you're agreement is with Carmoola, you'll need our permission before you can take your motor outside of the UK.

Read about what happens at the end of an HP contract

Can I Back Out Of A Hire Purchase Agreement?

If you're struggling to afford your monthly repayments or no longer feel that your Hire Purchase plan is right for you, then it's important to know where you stand legally in terms of terminating your contract.

So, here's the good news. You maintain the right to withdraw from your agreement with Carmoola for up to 14 days after your contract begins. You don't have to give us a reason, but you do have to let us know via the app or by email - and you must repay what you have borrowed. This is known as your Right To Withdraw.

If more than 2 weeks have passed, then under UK law, you do still have the right to end some types of car financing agreements early. This is known as Voluntary Termination, and it covers HP arrangements on both new and second-hand cars. However, if you choose to do this, you will have to hand your vehicle back and will have nothing to show for the payments you've previously made.

It's also important to know that in most cases, lenders will require you to pay at least 50% of the total amount owed before you can end your contract. If you haven't yet reached the halfway point in your payments but still want to cancel, you will need to make up the difference, i.e. if you have already paid 30%, you will have to pay the remaining 20%. This can be done as a one-off payment, or if your lender agrees, you might be able to pay off the leftover balance in instalments.

If you are unsure how much left you have to pay, you have the right to request a statement, which provides a thorough description of the repayments you still owe and the date these payments will come due.

If you purchased your car through a dealership, you could be given the option of trading in your motor for a new model and having the dealership pay off your outstanding credit on the original car. While this won't be a possibility for everyone, you may want to consider this option if you are eligible.

Can The Lender Repossess Goods?

Because you don't officially own the car until your HP agreement ends, your lender may be able to repossess the vehicle if you default on your payments. In most instances, the lender will have to obtain a court order to do this, especially if you have paid more than 1 third of the total cost.

Note: The rules differ between Scotland, Northern Ireland, England and Wales, so remember to check the laws where you live.

If your car is repossessed, the lender will auction off the motor, and the profits they receive will be used towards your debt. If there is still debt left over after this, you will have to pay what remains.

If you're finding that you can no longer manage the costs of your monthly repayment plan, you might want to consider speaking with your lender. They could be able to help you by offering to reduce the monthly rate, putting a temporary pause on payments or by giving you access to helpful information.

Find out more about re-possession due to default

Can I Transfer A Hire Purchase Agreement To Someone Else?

There are many circumstances where you might find yourself wanting to move your HP agreement into another name. But unfortunately, finance contracts aren't one-size-fits-all.

These contracts are determined by a number of different factors: including your personal finances, your credit score and the amount you're looking to borrow. This makes it unlikely for two people to qualify for the exact same arrangement, and because of this, these agreements generally can't be transferred to someone else. Nevertheless, there may be rare exceptions to this rule.

After reviewing your situation, you could find that your lender is willing to help. This means, after performing a credit check on the person you wish to transfer your HP contract to, they might agree to make the switch.

Remember, whatever the outcome, it's necessary to be open, honest and upfront with your lender about any changes you wish to make to your contract.

Find out more about transfers

Can HP Be Paid Off Early?

Whether you've been saving like mad, have recently come into a bit of money or just want to have some extra cash to play with each month, you may have considered paying off your HP agreement early by making regular overpayments or putting down a lump sum.

So, to answer your question, yes, it is possible; and doing so could save you quite a bit of money in interest. Nevertheless, it might not be worth it in every case. Here's why:

Admin Charges - By choosing to pay off your car ahead of schedule, your lender might charge you for any paperwork they have to complete.
Early Repayment Fees - It's not uncommon for finance companies to charge an early repayment fee to those who pay off their repayment plan ahead of schedule. Depending on the charge, it might be worth your while to stick with the original arrangement.
Negative Equity - The fees you incur could put you in negative equity. This means that the overall value of the car, and the amount you'd get from selling it, is less than the early settlement fee.

So, before making any final decisions, we recommend speaking with your lender to understand which option is best for you.