Buying a car through hire purchase

Car hire purchase (HP) is probably the simplest type of car finance plan. After paying a relatively low deposit, you hire your car with the option to buy it by the end of the contract. Here are the facts you need to decide whether it could be the right car-buying option for you.

How hire purchase works

Remember

  • You need a good credit rating to get hire purchase deals at the lowest interest rates
  • Always check the total amount repayable when comparing hire purchase with other finance methods

With hire purchase you usually (but not always) will have to put down a deposit of 10% of the value of the car. You then pay the rest of the value of the car in instalments, over a period of one to five years.

You are in effect hiring the car until you make your final payment, after which you own it.

Hire purchase is arranged by the car dealer, but brokers also offer this service. The rates are often very competitive for new cars, but less so for used cars.

The loan is secured against the car, which is why you can’t own it until you’ve made your last payment. Make sure you understand the terms and conditions of your loan before signing the contract.

Pros of hire purchase

  • Flexible repayment terms (from one to five years) to help fit in with your monthly budget – but the longer the term the more you’ll pay in interest.
  • Relatively low deposit required (normally 10% of the car’s price).
  • Fixed interest rates so you know exactly what you’re paying every month for the length of the term.
  • Once you’ve paid half the cost of the car, you may be able to return it and not have to make any more payments – find out more about cutting car finance costs.

Cons of hire purchase

  • You don’t own the car until you’ve made your final payment, which means that if you get into financial difficulties the finance company could take it away.
  • Your deposit and term length will affect your monthly payments. Your monthly payments are likely to be higher the smaller the deposit is and the shorter the term of the loan.
  • Until you’ve paid a third of the total amount payable the lender can repossess the car without a court order.

Examples of the cost of buying a car through hire purchase

Top tip

Find out how to build an emergency savings fund so that your car payments are covered if you have unexpected costs or a drop in income.

These examples are based on information given by a dealer’s online hire purchase calculator in March 2014.

New car priced at £13,690 – it would cost you £15,232.48 in total to buy the car through hire purchase. This is worked out on the basis that you:

  • Could pay a deposit of £1,105, had a car to offer for part exchange valued at £2,799, were able to get a rate of 10.3% APR, and were able to pay £305.68 a month
  • Paid a £175.00 acceptance fee with your first instalment and a £149.00 documentation fee payable with your final instalment

Used car valued at £6,990 – it would cost you £7,975.04 in total to buy the car through hire purchase. This is worked out on the basis that you:

  • Could pay a deposit of £490, had a car to offer as part exchange valued at £1,189, and were able to get a rate of 12.1% APR
  • Pay a £175.00 acceptance fee with your first instalment and a £149.00 documentation fee payable with your final instalment

Your next step

If you don’t keep up your car hire purchase payments, you may lose your car. So make sure you can meet your car payments.