A Guide to Hire Purchase (HP) Finance
Purchasing a car can be daunting if you don’t know the different types of finance solutions available on the market. One of the most popular is Hire Purchase, also known as HP. This finance agreement gives you full ownership of the vehicle at the end of the contract.
This guide will list everything you need to know about HP, so you can make the decision that best fits your needs.
- What is HP and how does it work?
- Why are there interest charges on hire purchase agreement?
- What are the advantages of HP?
- What are the disadvantages of HP?
- Negative equity
What is Hire Purchase and how does it work?
Hire Purchase (HP) is a finance solution used to spread out the cost of a vehicle into fixed interest rate monthly payments that will give you full ownership of the car at the end of the contract.
In other words, a finance lender loans you the money to purchase a car and you pay back in monthly instalments until the completion of the agreement. The average HP contract is three years, but it can vary depending on deposit and affordability of the monthly instalments.
The first step to get an HP is to find out how much you have to put down on the car. This could be crucial to define whether you’ll be able to honour the monthly payments that will follow.
The amount you’ll have to pay for the instalments will depend on how much you have to put down on the vehicle. The larger the deposit you put down, the lower your monthly payments are going to be.
The amount you’ll have to pay for the HP instalments is usually greater compared to other types of finance agreements, such as personal contract finance (PCP).
The reason for this is that there’s no final payment at the end of the contract. After the final instalment is paid, there will be a small charge for the transfer of the ownership and that’s it.
Why are there interest charges on Hire Purchase agreements?
As mentioned previously, getting a finance agreement means that you’re borrowing money from a finance lender. Hire purchase works like other loans where there’s an interest rate as part of the payment.
The good news is that HP works on a fixed interest rate, which means that the amount you’ll be paying monthly will always be the same.
What are the advantages of Hire Purchase?
The best way to find out if Hire Purchase is the best finance contract to get your car is weighting down the pros and cons. Here are the advantages you should consider:
HP is budget friendly
When you get an HP contract you’ll know exactly how much you’ll be paying each month and for how long. This should help you keep track of your personal finances and allow budgeting for other things you may need or want.
Deposit is flexible
The average deposit for car purchase is 10 percent of the vehicle’s value. However, Hire Purchase is more flexible when it comes to how much you can put down on the car. If you already have a car to trade in and a bit of money saved, you could use both as down payment and decrease the time of contract and/or the amount you’ll pay every month.
You'll own the car at the end of the contract
Unlike other finance contracts, such as PCP, you won’t have to save up money for a final payment. At the end of the contract you will have paid everything you owed and you’ll only have to pay a small fee to transfer ownership of the vehicle. This will also help with your personal finance as you won’t be paying instalments and saving up for the balloon payment at the same time.
Easier to get if you have a low credit score
HP is easier for those who don’t have a high credit score because the loan is secured on the car itself. This means that the lender counts solely on the monthly payments and if at some point you can’t honour the instalments the car will be reprocessed (but your other assets will be safe).
What are the disadvantages of HP?
The sound of the advantages may be exactly what you’re looking for but here are the disadvantages you should consider:
You can't modify the vehicle
When you buy a car through HP you won’t own the vehicle until the ownership is transferred to you at the end of the contract. That means you won’t be allowed to change anything on the car until the car is yours. By doing so, you may accrue penalties and repairment fees added up to the amount you already owe.
Also, you won’t be able to sell the vehicle until the car becomes yours, so you can’t count it as an asset until the final instalment has been paid.
Lender doesn't need a court order to repossess the vehicle
Before jumping into an HP agreement, it is extremely important to do the maths and make sure you will be able to meet the monthly payments. By failing to do so the lender will be able to repossess the vehicle without a court order if you haven’t paid at least a third of the car’s value.
It turns out more expensive
One thing to keep in mind is that by the end of the HP contract you will have paid more for the car than it may be worth at the time. The interest rate will put the overall car price up, making it more expensive than buying it outright.
The term negative equity may be familiar to you if you’ve ever shopped for a house. The same principle applies to cars: if you have to pay more for the final payment than your asset is worth, you’ll be in negative equity.
It’s important to consider that this might apply to you if you need to terminate an HP contract early. Hire Purchase agreements allow you to end the contract at any time, however you’ll be required to honour up to 50 percent of the vehicle’s value.
If you have paid the 50 percent or more you can end the contract, return the car and you won’t have anything else to pay. If you haven’t, you will have to pay the remaining balance and if the final payment is more than the car is worth at that time you’ll be in negative equity.
Have you made up your mind and are ready to choose your new car?
Frequently Asked Questions
Yes. Hire Purchase contracts allow you to end the contract at any time, but there are some nuances to keep in mind.
If you terminate the contract before paying at least 50 percent of the value of the agreement, you’ll have to pay the remaining of the 50 percent balance, as well as returning the vehicle.