Guide to Car Leasing – part 3 of 7
Hire purchase is the traditional method of financing a vehicle, but is it always the best?
Hire purchase explained
With hire purchase the vehicle becomes the property of the lessee at the end of the period. The basic concept is that you pay a deposit, and then pay off the balance in monthly instalments over an agreed period of time. The level of the deposit paid, the period of the contract and the sale price of the vehicle determine the monthly payment.
Car leasing dealers are keen to push hire purchase but consumers should be cautious, as they will not own the car until EVERY repayment is made. In effect the consumer takes the car with the right to buy. It's crucial to shop around for a decent hire purchase agreement because interest rates vary widely and you must pay close attention to the APR in order to establish the real cost of borrowing.
Generally speaking, hire purchase rates are normally considerably higher than the personal loans best buys, although some manufacturers will have special offers. There are also a number of additional fees associated with hire purchase, including an 'option to purchase' fee, and you are unable to sell the car until you have bought it outright - this also means that the hire purchase company could repossess your vehicle if you break the contract.
The advantages are that hire purchase offers real flexibility as you can end the agreement simply by returning the car and you should only have to pay up to half the cost (less what you have already paid). As a hire purchase loan is secured on your car there is no risk of losing your home and you will own the car outright once the fees are paid. Though the monthly payments are likely to be higher, the overall sum paid back is usually lower.
Advantages of hire purchase:
- You own the car once all repayments are made.
- You can end the agreement by returning the vehicle.
- Less risk than a loan.
- Overall sum paid back is usually lower.
Disadvantages of hire purchase:
- Hire purchase rates are usually higher - you will pay back more each month.
- There are usually additional fees such as an 'option to purchase' fee.
- You will not own the car until every repayment is made.
What about lease purchase?
This is a method of financing a vehicle that is usually used by VAT registered businesses or companies. The cost of the vehicle, the period and estimated future value (based on the proposed annual mileage) are the determining factors when fixing the monthly rental fee.
At the end of the contract a payment equivalent to the estimated value is payable and the vehicle becomes the property of the lessee. This usually works out as a cheaper option than hire purchase.
In part four we take a look at car leasing.
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