A hire purchase agreement is a simple way of buying a car on finance, aimed at those who may want the option of owning their car outright at the end of the term. Benefits of Hire purchase include:
- Fixed interest rate
- The deposit and term can be adjusted to find the budget that suits you
- The finance is against the car
- The agreement can be settled early
- You will own the car outright at the end of the agreement
What is Hire Purchase?
A hire purchase (HP) agreement allows you to outright own your car at the end of the agreement term. While this process isn’t necessarily automatic, as some lenders require a final fee, this fee can be as little as £1.
The full value of the car is split between the deposit and monthly repayments. While monthly HP payments are typically higher than comparable PCP deals, HP works out as a cheaper way of owning the car. However, you'll have less flexibility than with PCP deals; for example, you won't have the option to upgrade the car towards the end of the term.
The car acts as security on the loan, which lowers the risk to lenders. That's because they can repossess the car and sell it to recover losses if you miss too many payments. On the plus side, the reduced risk often means a lower typical APR.
HP finance is usually taken over 1-5 years, although available terms differ between lenders. There are no limits on how many miles you clock up.
What happens at the end of a hire purchase finance deal?
At the end of a hire purchase agreement, you have the option of owning your car outright. Depending on the hire purchase deal you signed up for this could even be automatic, but there is usually a small fee.
In many cases, you’ll need to pay a final fee to your lender before owning your car becomes official. This is known as the ‘option to buy’ fee and, depending on your deal, this could be as little as £1. Always check the terms of your hire purchase agreement before you sign it as this fee cannot be negotiated at a later date.
It’s worth remembering that the car is owned by the finance company until all the scheduled finance payments have been made and the ‘option to buy’ fee has also been paid.
It’s also worth noting that if you have paid off at least half of your hire purchase agreement, then you may have the option to return the car and walk away. This is known as ‘voluntary termination’ and you’ll want to check your contract to see whether this clause is included. For more on this check our guide on whether you can sell a car with outstanding car finance.
Is Hire Purchase car finance right for me?
Hire Purchase: Things to Consider
- While HP deals are designed for those who want to eventually own the car outright,
you don't actually own the car until you've made all the payments.
- Even though it's a cheaper way to buy the car overall, the monthly payments can be
more expensive than other finance options.
- It's possible to finance a car through HP if you have bad credit, but the best deals are saved for those with good credit.
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Frequently Asked Questions
There is no annual mileage limit on hire purchase car finance. You’re free to drive as much as you want.
The cost of a hire purchase agreement will change depending on a number of factors:
- The type of car
- The length of your agreement
- Your credit rating
Our car finance calculator can help you work out what you can afford.
A general rule of thumb for a deposit for hire purchase agreements is that a larger deposit can be more beneficial in the long run, but it all comes down to what you can afford.
Generally, if you have cash reserves but a lower monthly income you will be better off with a large deposit. If you have less savings but a better monthly income, you may need to consider a lower deposit.
You have a couple of options for paying off HP car finance early:
- If you haven’t paid half the value, you can pay up to the 50% threshold and return your car.
- If you have already paid over 50% you cannot do this and return it, but you can pay off the remaining amount and keep the car. You may be subject to an early exit fee if you do this.
If you make all of your payments across the term of the agreement a hire purchase deal can be good for your credit rating. This is because it shows you have the ability to make regular payments over time and pay off your debts.
If you miss a payment, or a number of payments, it can however have a negative affect on your credit rating.
HP agreement terms can vary. They''re usually between two to five years, but can be shorter. The term length can affect the monthly payments, as well as the deposit.
On a hire purchase agreement, the lender is the legal owner of the car during the course of the agreement.
At the end of the term, once you have paid all outstanding costs, you will be the legal owner.