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
What is hire purchase?
Hire purchase or HP is a popular way of financing a car purchase. You typically pay an upfront deposit and then make fixed monthly payments for an agreed period.
At the end of this fixed term you’ll own the car outright without the need to make a large final payment (although you may be charged an administrative ‘option to purchase’ fee).
How does a hire purchase agreement work?
It’s important to understand what you’re signing up to because hire purchase contracts can include extra fees or charges – particularly if you miss any monthly payments.
Deposit: You’re likely to be asked to pay an initial deposit to secure the car. This can often be done via a part exchange if you have a vehicle to sell. You may have a choice as to the size of the deposit – the more you put down, the lower your monthly instalments
Monthly payments: You’ll start to pay regular fixed monthly instalments for an agreed period. It’s important not to miss any payments or you risk penalty charges or even having to return the car
You become the registered keeper: The car will be in your name, but until you’ve paid all the instalments it will still be owned by the finance company. This means you pay to run and insure it, but you can’t modify it or sell it on
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
What are the pros and cons of hire purchase?
You’ll own the car: Once the final monthly payment is made the car is yours and you can decide what to do with it
Unlimited mileage: Unlike other types of car finance there isn’t usually a cap on annual mileage that you have to stay below
More accessible: HP might be easier to get than a personal car loan if you have a poor credit rating
Room for manoeuvre: You can often negotiate the term before you sign to reduce monthly payments or the overall cost
Exclusive to dealerships: HP is not usually an option for private car sales
Risk of repossession: The car could be taken back if you fall behind on payments meaning you could lose what you’ve paid so far
No modifications: Because you don’t own the car until the end of the deal, you won't be able to sell or modify it during the term
Maintenance costs: As the registered keeper you have to pay to insure it and maintain the car, which isn’t always the case with other types of finance
How much will hire purchase cost me?
An HP deal will include any up-front deposit you pay plus the regular monthly payments.
The cost of the regular monthly payments will depend on:
The amount you’re borrowing. The more you borrow, the higher the monthly payments – although these can be offset with a larger deposit.
The length of the deal. The longer the term and the more monthly payments you make, the lower each will be. Typical terms are three to five years.
Our car finance calculator can help you work out how much a HP deal might cost.
Will a hire purchase agreement affect my credit score?
Taking out HP can affect your credit score, but how you manage your monthly repayments will have a bigger impact.
If you pay late or miss any payments, this can damage your credit rating, but if you pay on time and in full every month, you can prove to lenders that you can responsibly handle credit, and your score may even rise.
If you already have a lot of credit agreements in place, taking out HP might give lenders cause for concern. But if you’ve rarely borrowed before, managing a hire purchase agreement responsibly could also give future lenders confidence you can handle credit.
Is hire purchase right for me?
Whether HP is right for you will depend on your finances and personal preference.
If you like the idea of owning a car but can’t afford one outright, then HP allows you to buy it over time. But you’re also likely to pay more money overall than you would if you bought it outright.
What are the alternatives to hire purchase?
Personal contract purchase(PCP): You pay a deposit and monthly instalments and at the end of the term you must pay a final ‘balloon’ payment if you want to keep the car. While this could be seen as a costly expensePCP can also keep monthly repayments lower because you are only covering the depreciation value of the vehicle, not paying off the full cost.
Personal contract hire(PCH): A form of leasing, you generally hire a new car for an agreed period – usually between one and four years – and make fixed monthly payments until the lease ends. You then return the car without further obligation. It can become more expensive if you exceed the agreed monthly mileage allowance, damage the car or if you want to end the lease early.
Car Loans: A personal unsecured loan taken out to buy a car outright. You borrow what you need to make the purchase in a lump sum and then clear the loan through regular repayments to the loan provider - effectively spreading the cost. An advantage is there are no extra fees and charges to pay (as long as you keep up with your repayments), which you may get with HP or PCP deals.
Other useful guides
You can find out more information from our other car finance guides such as…
Compare hire purchase deals with MoneySuperMarket
You can compare HP deals using our partner Motiv's free service by following these steps:
Enter your personal details. Your details are needed to check your eligibility for offers, but don’t worry there will be no impact on your credit score.
Select your ideal car. If you’ve already found your ideal car then enter those details. If you haven’t found your new wheels just yet don’t worry, you can still use the service.
Choose your deal. If any of the offers match your needs then you'll be able to continue your application online with your chosen finance company.
Am I able to pay off my HP deal early?
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 the deposit of monthly payments.
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.
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.