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What is hire purchase?

Car hire purchase (HP) contracts allow drivers to pay monthly for a vehicle (after an initial deposit) before owning it at the end of the contract. The loan is secured against the car until that time.

As such, hire purchase finance options are a popular option for those who wish to purchase a new or used car but would prefer to stagger the payments.

How does hire purchase work?

Anybody can take advantage of a hire purchase contract. The only criteria is that the named driver is able to uphold the monthly payments and can afford the initial deposit.

The initial deposit on a hire purchase loan is usually 10% or more of the car’s value. Monthly payments are then calculated based on the remaining value left over. The longer the contract, the cheaper the monthly instalments - although interest rates in the long term can be more costly.

Most hire purchase finance repayments are set over a period of 12 to 60 months, with car dealers arranging the terms of the contract, including the (fixed) interest rate for the loan. Interest rates will vary depending on the vehicle, dealer, whether the car is new or used, and the driver’s credit score (good credit scores produce lower rates).

At the end of the hire purchasing contract, the driver is offered an ‘Option to Purchase’ fee, which grants full ownership of the vehicle. Once this is paid, the driver owns the vehicle and no further monthly payments need to be made.

Important information about hire purchases

Hire purchase leases are a financial contract, so it’s important you know exactly what you’re getting before you sign along the dotted line.

What are the advantages of hire purchasing?

  • No large up-front costs: Hire purchase contracts give drivers the freedom to pay off their vehicle as they use it, after an initial deposit.
  • Flexible payment plans: Most car dealers offer contracts between one to five years, giving drivers the chance to select their most preferred payment plan.
  • Lots of HP options: Many car dealers offer excellent HP deals on their core fleet, including electric vehicles.
  • Fixed interest rates: Once a rate has been agreed between the driver and car dealer, it is locked in place for the duration of the hire purchase lease.

Hire purchase vs personal contract purchase

Hire purchase loans and Personal Contract Purchase (PCP) agreements both offer monthly payments for a loan secured against a vehicle and include low initial deposits. However, their contract terms are not the same.

Read below for some of the most critical differences.

  • The higher the annual mileage that you add to your PCP agreement, the larger your monthly payment
  • PCP calculates the car’s predicted value at the end of the contract, whereas HP loans require drivers to agree a final price at the start of the contract.
  • There is often a higher cost to own the vehicle at the end of a PCP contract. These ‘balloon payments’ take into account what the dealer thinks the car is worth now, with drivers paying off the outstanding balance.
  • Where HP loans provide the option to drive until they buy, those with PCP can choose to give the car back, use the resale value to buy a new car, or pay the resale value and keep the car.

Take a look here for a more detailed comparison of hire purchase v lease options like PCP.


Can I terminate a hire purchase agreement early?

The Consumer Credit Act allows for the possibility of terminating a hire purchase agreement early, but only if there are significant changes to your circumstances, such as losing your job. As long as you have paid for at least half of the car’s value, it is possible to return the car without having to make any more payments.

It’s worth noting that you can terminate a hire purchase agreement early if you haven’t paid up to half of the value of the car too. However, you will need to pay the difference between what you have paid and half the car’s value.

Read our blog post on cancelling car finance for more information.

What happens if I don’t pay my monthly hire purchase repayments?

In the event you miss a monthly hire purchase repayment, you’ll receive a notification from your financial lender. This may also include an additional fee or an increase to the interest you need to pay. If you continuously miss payments, you’ll be at risk of having your car repossessed.

What cars are available with hire purchase?

From affordable manufacturers like Dacia and MG to the electric majesty of Mazda and Vauxhall, there are plenty of used and new cars available with hire purchase at Bristol Street Motors.

For more information on lease financing and hire purchase options, reach out to us today to make an enquiry. Alternatively, you can learn about our different financing options available on our car finance explained page.