The “Never Never”.
Let’s face it, we don’t all have a few thousand pounds stuffed behind a sofa cushion to buy a car outright. With recent events sapping incomes left and right, gathering together large sums of cash has become more difficult than ever.
This is where financing like Hire Purchase comes to the rescue.
Hire Purchase is what your parents might have called the “Never Never”, as it allows large payments to be stretched out over time. Here’s how it works:
- You pay a Deposit on the car – this is usually around 10% of the total cost of the vehicle up-front.
- You pay monthly installments that are equal to the remaining cost of the car + the APR your lender or dealership charges.
- At the end of the agreed term, you own the car.
It’s Basically a Loan.
Hire Purchase isn’t just paying for something over time, it’s a loan. Your finance company, bank or dealership are lending you the money to buy the car (the manufacturer or previous owner wants paying immediately!) and you’re paying that money back over time, plus interest and fees.
You Need to Know This:
The loan is secured against the car you’re buying, meaning that you don’t own the car until you’ve paid the loan back in full: the bank/finance company/dealership does. Hence the “Hire” bit in the name.
That’s an important point to keep in mind because if you miss or don’t repay your installments, the lender will take the car from you and sell it to someone else to make their money back.
If this happens, you lose your deposit and all the monthly payments you’ve made to this point.
And they’ve got the car.
Sounds Harsh. What’s the Upside?
The upside is that your monthly repayments tend to be nice and affordable and, so long as you keep paying them, you always have a car at the end of the agreement. You can keep it, sell it, use it for Evel Knievel-style stunts: whatever takes your fancy.
You have an asset. And you didn’t have to donate a kidney to buy it up-front.
Hire Purchase is also the most popular way of buying second hand cars. As they cost less than a brand new cars, the deposit and repayments can be very affordable, and it allows the seller to get a lump sum without any risk. With a good Hire Purchase deal, the financial weight of buying your car could fit seamlessly into your monthly outgoings. It’s a win-win.
But aren’t PCP Deals Cheaper Per Month?
Usually yes,… but with a big caveat.
See, PCPs don’t cover the whole cost of the vehicle, only part of it. If you want to own the car at the end of a PCP agreement, you have to pay a Balloon Payment at the end of 3 or 4 years. This could be many thousands of pounds in a big lump sum.
And if you don’t pay it, you don’t get the car. You could be offered a swap to a newer car, however.
PCPs are generally more popular with people who want a brand new car, which tend to be much more expensive, and are happy to upgrade every few years.
The advantage of a Hire Purchase agreement is that you always end up with a car. You always own an asset in the end.
If you have any questions about Hire Purchase deals and whether they are the right choice for you, give us a call and get in touch. You can also get an idea of what deal you could get by filling in our hands Car Finance Calculator here.
Take a look at some of our other useful articles on all things car finance by clicking here.
Stay Safe on the Road.