What is Hire Purchase?
Hire Purchase is the simplest of the major forms of car finance to explain. It helps spread the cost of a new car across a period of time. Once you’ve paid the last instalment, you own the car – there’s no need to pay a final instalment like with a PCP agreement.
>> What is PCP?
How does Hire Purchase work?
From the get-go with Hire Purchase you’re committing to owning the car. Put down a deposit, pay a series of monthly repayments, then the car’s yours. Some companies may charge you a fee, typically ranging from £10-£100, to transfer you as the legal owner of the car.
As there is no final payment needed to take ownership of the car – unlike with PCP – monthly Hire Purchase bills are typically much higher than a PCP alternative. However, you won’t have to save a large lump sum during the contract to purchase the car outright at the end of the scheme.
Though people on a tight monthly budget can get more car for their money with PCP set-ups, anyone looking to buy a car may get a better deal overall with a Hire Purchase agreement. As the driver pays off a greater amount of the car’s cost every month, less interest is added to the bill than with a PCP plan for an identical model, if the APR figures are the same (though there is no difference with 0% APR offers).
However, while some companies offer the same discounts on Hire Purchase plans as PCP alternatives, other brands offer more substantial savings on PCP schemes – in the form of deposit contributions – making these cheaper overall for anyone intending to buy the car.
Therefore, it’s worth comparing Hire Purchase and PCP offers closely to see which has the larger incentives, better APR figure and lower total cost – even if you’re sure you want to keep the car at the end of the finance contract.
HP agreements are typically available over a longer period than PCPs, which in turn reduces the monthly payment. PCP offers usually run over three or four years, Hire Purchase options can last up to five or even six years – though you can reduce the period if you have a larger monthly budget.
Hire Purchase offerings don’t cap your mileage or issue charges if you damage the car – as you will own it at the end of the scheme. However, you could be stung with large charges for exceeding the agreed mileage limit or returning a damaged car with PCP offers.
Other finance options include PCP and leading. But should you lease or buy a car?
Hire Purchase example
Cash price of car: £10,000
Deposit: £1,000
Monthly instalments: £192.87
Option to purchase fee: £200
Term: 60 months
APR: 11.3%
Total amount payable: £12,672.20
The APR rate here used is from a well-known finance company. Much lower interest rates are associated with dealer-backed finance packages. The rate offered to you is also largely dependent on your credit score.
>> 0% APR deals
Hire Purchase advantages and disadvantages
Advantages of Hire Purchase
> No need to save up for a large final payment
> In some instances cheaper than a PCP deal
> More agreement lengths than PCP or leasing
> No mileage caps or damage waivers
Disadvantages of Hire Purchase
> Not as ubiquitous as PCP
> Not as simple as leasing
> Higher monthly payments than PCP
> Not all car manufacturers offer HP agreements
> No option to buy – you’re committed to it
Further reading:
>> All of the manufacturer-backed no deposit deals
>> No deposit 0% APR deals revealed
>> Used car finance explained
>> Best cars for £90 per month
>> Best cars for £100 per month
>> Best cars for £150 per month
>> Best cars for £200 per month
>> Best cars for £300 per month
>> Best cars for £400 per month
>> Best cars for £500 per month
>> Top cash and finance deals
