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What is HP?

What is a hire purchase agreement and how does it work?

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

By Tim Heming

Published: 04 February 2022

Man driving

 

 

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 – which typically varies from one to five years – 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). 

As the name suggests, the definition of hire purchase is hiring the car until you’ve made the final monthly payment – which then means you own it outright. 

How does hire purchase 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.

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..

 

 
36 Month Example

 

Car Price

£10,000

Deposit

£2,000

Representative APR

12.9%

Option to purchase fee

£10

Monthly cost £266.46
Total cost of credit £1,602.48

What are the pros and cons of hire purchase?

Advantages

  • You own the car after the final monthly payment 

  • You aren’t limited by mileage as with other car finance types 

  • It’s often available on used cars as well as new models

  • Might be easier to get than a personal car loan if you have poor credit

  • You can often negotiate the term before you sign, to reduce monthly payments or the overall cost

Disadvantages 

  • HP is not usually an option for private car sales

  • The car could be repossessed if you fall behind on payments

  • 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

  • But as the registered keeper you do have to pay to insure it and maintain it 

What happens at the end of a hire purchase 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.

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. 

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. 

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 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 sting in the tail, PCP 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…  
 
A guide to personal leasing 
The difference between PCP and HP car finance 
Is car finance or a loan right for you? 
 

Compare hire purchase finance deals with MoneySuperMarket 

 

You can compare HP deals using our partner Motiv's free service by following these steps:

  1. 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. 

  2. 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.

  3. 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.