Buying a car through HP Hire Purchase?

What is hire purchase (HP)?

Hire purchase is a way to finance buying a new or used car. You (usually) pay a deposit and pay off the value of the car in monthly instalments, with the loan secured against the car.

This means you don’t own the vehicle until the last payment is made.

How hire purchase works

Usually, you’ll first need to put down a deposit on the car you want to buy. For most hire purchase agreements this will be 10% or more of the vehicle’s value.

The rest of the value of the car will then be paid off in instalments over a period of 12 to 60 months (one to five years).

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. For second-hand cars the annual percentage rate can vary from 4%–8%. The lower the number the better.

The rate could be higher for example beacuse you don’t have a good credit score. See our guide How to improve your credit score for more information and how to check your reports for free.

The loan is secured against the car. This means you only own the car after you’ve:

made all the repayments, and
paid a final ‘Option to Purchase’ fee – typically £100 to £200.

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 might be able to return it and not have to make any more payments.

If you don’t have a high credit score, it might be easier to get a hire purchase than an unsecured loan, as the car is used as collateral for the loan.

It doesn't usually come with milage restrictions.

You don’t need to find a large sum to purchase the car like with PCP.

Cons of hire purchase

You don’t own the car until you’ve made your final payment, which means if you get into financial difficulties the finance company could take it away.

You can’t sell or modify the car over the contract term without getting permission first.

Monthly payments are usually higher than for PCP and leasing deals.

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.

It can be an expensive route if you only want a short-term agreement.

Examples of the cost of buying a car through hire purchase

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

For a car priced at £25,000:

Deposit: £2,500
APR: 5.7%
term (length of the contract: 60 months (5 years)
average monthly payments: £431
Total amount payable: £28,411
(deposit + loan + interest: £2500 + £22,500 + £3,411).

We also recommend that you check if there are any additional fees and charges on your loan.

To help you work out how much a loan will cost, use the Money Saving expert loan calculatorOpens in a new window

How to get the best hire purchase deal

There are three main options here:

getting the finance through the dealership you’re buying the car from
getting finance through an online broker
getting finance through your bank.

It’s useful to search online first so you’re armed with some numbers to haggle with in dealerships. Offers can vary significantly online and in dealerships so getting more than one quote is essential.

To help you compare the different offers, ask for:

>the APR you’ll be paying
>the total amount repayable
>the total cost of credit
>any additional fees.