What is hire purchase? A complete guide
HP is a form of car finance where you pay a deposit and monthly instalments for a fixed term before you own the vehicle. Our guide explains more
Key takeaways
Hire Purchase (HP) is a financing arrangement that allows you to purchase a car by paying an initial deposit followed by fixed monthly payments
HP is suitable if you want to own a car without upfront payment
The finance company retains ownership until all payments are complete
What is hire purchase?
Hire Purchase (HP) is a finance agreement that allows you to drive away in a car by paying an initial deposit followed by fixed monthly payments.
Once you've made all the payments, the car becomes yours. Unlike some other finance options, there's no large final payment, often referred to as a 'balloon' payment, which is a common feature of personal contract purchase (PCP) finance.
How do hire purchase agreements work?
1. Put down a deposit
The journey to owning a car through HP begins with an initial deposit. You can pay this upfront or through part exchange. The size of your deposit is inversely proportional to your monthly payments — the larger your deposit, the smaller the subsequent payments.
2. Registration and ownership
During the HP agreement, the car is registered in your name, but the finance company retains ownership until you've completed all payments. You're responsible for the car's insurance and maintenance, but you can't sell or modify it until you've paid off the finance.
3. Monthly payments
With the deposit out of the way, you'll commit to fixed monthly payments over a set period. It's important to note that failing to make these payments can lead to penalties or, in some cases, the need to return the car.
4. You own the Car
Once you have made the final payment, you will be the legal owner of the car. There may be an ‘option-to-purchase’ fee but you won’t face a large final payment - the ‘balloon’ payment - as you would with personal contract purchase finance.
Pros and cons of HP
Pros
Ownership: The car is yours after the final payment
No mileage limits: Drive as much as you want without worrying about mileage caps
Accessibility: HP agreements may be more accessible to those with less-than-perfect credit scores
Flexibility: There's often room to negotiate the terms to suit your financial situation
Cons
Dealership exclusive: HP isn't typically available for private car sales
Repossession risk: Missing payments could lead to the car being taken back
No modifications: You can't make changes to the car or sell it before completing the payments
Maintenance costs: All running costs, including insurance, are your responsibility
How much does HP cost?
The total cost of a HP finance agreement depends on factors such as the deposit you put down, the length of your agreement term, and interest rate. Here is an example of how much a HP agreement could cost:
| 36 Month Example |
|---|---|
Car Price | £9,000 |
Deposit | £1,000 |
Representative APR | 14.9% |
Option to purchase fee | £10 |
Monthly cost | £186 |
Total cost of credit | £3,161 |
Source: Motiv Finance. Representative 12.9% APR
Our car finance calculator can help you find out more about how much a HP agreement costs.
Am I able to pay off my HP deal early?
Yes, you can choose to end your HP agreement early by letting your finance provider know and asking for a settlement fee. This is usually a lump sum calculated from any unpaid instalments and interest. Whether it’s the right decision for you will depend on the settlement fee offered.
Weigh it up against the total you’d pay if you carried on with the HP agreement and completed all the outstanding monthly payments until the end of the term. If you’re struggling to make the monthly payments, you can also terminate your agreement early and hand the car back under a voluntary termination.
Check the terms of the contract because you’ll typically need to have paid off a minimum amount (at least half of what you owe) and you won’t receive any refund on your deposit or monthly payments.
It's also worth noting that you may be charged an early repayment fee and ending your agreement early might have a negative impact on your credit score.
What happens at the end of the agreement?
When you pay your final monthly payment (plus usually a small administrative fee to transfer ownership), you own the car outright and can choose to keep it or sell it on.
This differs from other types of car finance, such as personal contract purchase (PCP) where you will need to pay a final large payment to keep the vehicle, or leasing, where you return the car after the lease period.
What is a conditional sale agreement?
A conditional sale agreement is a form of hire purchase where ownership passes to you automatically once the finance is repaid in full.
Like other forms of HP, you put down a deposit and pay agreed monthly instalments. The only difference is that with some types of HP you might have to pay an ‘option to purchase’ fee which covers the administrative cost to the finance company of transferring ownership of the car to you.
How does HP impact my credit score?
Taking out a HP agreement can temporarily affect your credit score, but how you manage your monthly repayments will have a bigger impact. Consistent, on-time payments can improve your credit rating, while late or missed payments can have a negative effect on your credit score.
What happens if I can't repay my HP deal?
If you’re unable to repay your HP deal the finance provider may be able to repossess your car. It is likely to depend on the terms of your contract and how many monthly repayments you have already made. If you start missing repayments it could also damage your credit score.
Is hire purchase right for you?
HP might be the right choice if you're looking to own a car without paying the full price upfront. However, it's essential to ensure you can afford the monthly repayments and to compare HP with other financing options, such as a car loan or personal contract purchase.
Alternatives to hire purchase
Here are some alternatives to consider if you're looking at other car financing options:
Personal contract purchase
Personal contract purchase (PCP) is another popular finance option for both used and new cars. It works in a similar way to hire purchase, but at the end of the contract you have the option to pay a larger and final balloon payment to keep the car. If you’re attracted to the lower monthly payments of leasing but looking to either buy a used car or have the option to own the car at the end, then a PCP could be for you.
Car leasing
You pay an upfront fee to lease the car and decide the contract length and annual mileage limit. Once you take out a contract, you pay fixed monthly payments until your contract ends. After the final payment, you return the car to the dealer or take out another lease.
Personal loan
Also known as bank loans, personal loans can be used to purchase a new or used car. They offer additional flexibility because the money goes directly into your bank account leaving you free to buy whatever car you wish, including those for sale with private sellers. Car loans can offer very low interest rates, but typically those rates are only available to applicants with excellent credit scores. Find out more about your credit score with our free credit score service.
For more in-depth information, consider exploring a guide to personal leasing, the difference between PCP and HP car finance, and whether car finance or a loan is right for you.
Comparing Hire Purchase Deals
When you're ready to compare HP deals, MoneySuperMarket's free service can help you find a deal that matches your circumstances. Enter your details, select a car, and choose a deal that suits you best, all without impacting your credit score.
Our guide on the best ways to finance a car provides further insights, and our car finance calculator can help you estimate the cost of an HP deal.
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