What is Hire Purchase (HP) car finance?

Hire Purchase (HP) remains a popular choice for consumers looking to finance a vehicle

Despite the major rise of personal contract purchase (PCP) over recent years, Hire Purchase (HP) remains a popular choice for consumers looking to finance a vehicle. HP’s straightforward scheme makes it easy for consumers to digest their finance deal. 

The first steps a consumer must take towards securing a HP agreement is to put down a deposit, which in most cases, will be between 5 to 15%. 

It will also be decided on how long the term of the deal will last - this can vary, but many consumers opt for between two to five years, meaning they will have to pay a fixed monthly rate throughout the process.

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To put it simply, that fixed monthly rate, including an interest rate of around 7% flat annual rate or 13.9% APR, will allow the consumer to pay for the remainder of the car (minus the initial deposit) over the term, meaning that at the end of it, the car will all but belong to them. There will just be an ‘option to purchase fee’ to pay at the end, which is usually no more than £200. However, it must be made clear that car dealers and finance houses are presently charging 10% flat rate or 19.9% APR, with some car lenders exceeding these figures and lending at 25% flat rate and 49.9% APR for customers with a poor credit score, and this is creating long term high debt situations.

Naturally, the cost of the fixed monthly payments will vary depending on the amount of deposit paid upfront, the length of the term and the credit score of the customer. Additionally, if a higher deposit has been paid, for example 20 to 30%, then the customer will have cheaper fixed payments throughout the term.  

But what happens if a consumer wants to get out of their finance deal early? 

As circumstances may change or the consumer may decide on entering a different finance deal, there is some flexibility to step away from a HP throughout the term. 

However, a HP can be terminated after a minimum of 50% of the monthly payments has been made. The car must also be returned in a good condition, otherwise the customer will incur a further charge against them so the car can be brought back up to a good condition. 

The major positive of a HP is that the customer will become the owner of the car at the end of the term without having to make a balloon payment. Another advantage is that the consumer is free to rack up as many miles per annum as they wish without having to worry about any additional payments at the end of the term.

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While many customers are enjoying the luxury of being able to change their vehicle every two to three years, many still recognise the value in owning their own car outright after a HP.

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