Hire Purchase (HP)
Buying a car on HP is ideal for those looking for a straightforward finance agreement. The most crucial difference between this method of purchase and either PCP or PCH is that at the end of the agreement the car can be yours to fully own upon payment of a final, agreed balance. These contracts are generally simple, can be arranged quickly and are available in most car dealerships.
Hire Purchase is, in essence, a hire agreement which gives the buyer an option to buy the car at the end of the agreement period. These contracts are normally established on a fixed contract basis, which means that APR (Annual Percentage Rate) is set before the contract begins and this approach is therefore helpful when budgeting. The term of the loan is also fixed – in most cases they run around three to four years – and the finance agreement is secured against the car being bought.
If you are the 'registered keeper' of the car you will also be responsible for insuring and maintaining it (and where relevant obtaining an MOT), but the finance company is the legal owner until the amount borrowed has been repaid in full.
When the Agreement Starts:
Agree the amount you want to borrow, this is based on the price of the vehicle less any deposit required. Many people part-exchange their old car to help cover the deposit, and in some circumstances some car finance companies will run promotions under which they will contribute to customers' deposits. Once the final loan amount is agreed the car dealer will contact the finance company or broker and will complete an application based on this amount.
When the Agreement Ends:
When all repayments have been made there will be an option to purchase the car and gain outright ownership. This means paying an 'Option to Purchase' fee which covers the admin costs to the finance company of transferring ownership of the car to you. Under a conditional sale agreement ownership passes to the buyer automatically as soon as finance is fully paid.
If you wish to settle a Hire Purchase agreement – either partially in full – before the end of the agreement, then you are entitled to make early repayments to your finance company. In this event you should speak to them for advice on how best to do this. You cannot sell or modify the car during the term of the agreement as technically the car does not belong to you.
Advantages of Hire Purchase/Conditional Sale:
- Quick and easy to arrange in the car dealership.
- Credit agreements are regulated by law, which means you will have important rights and protections.
- A low deposit can be paid at the start of the agreement.
- Choice of payment terms – these are normally between 12 and 60 months (1-5 years).
- Repayments fixed at the same amount throughout the agreement which can help with budgeting.
Things to remember:
As the car is not owned until the end of the term you cannot sell or modify it without first seeking the permission of the finance company. Under the Conditional Sale agreement, ownership of the car will automatically transfer once the final repayment is made.