Hire Purchase (HP) finance explained!

Even if you’ve never had car finance before, you’re probably familiar with the term Hire Purchase (HP).

After all, HP loans don’t just apply to new and used cars - they’ve been omnipresent in British life since first surging in popularity during the 1950’s when large department stores began offering them to enable purchases on everything from fridges to carpets.

But what exactly is Hire Purchase (HP) and what are the 'pros and cons’ of this method when it comes to financing a car purchase?

Boiled down to its most basic level, HP is a ‘secured’ loan agreement where you finance the total cost of the car (plus interest) in agreed monthly instalments...but don’t officially ‘own' the vehicle until it is paid off in full.

Hence the name ‘Hire Purchase’; The buyer effectively ‘hires’ the vehicle during the instalment period and eventually ‘purchases’ the car when the final payment is made.

As the loan is ‘secured' against the car, a HP agreement is similar to a mortgage in the way that the finance provider could repossess their asset (the car) if you fail to keep up with the repayments!

 

The ‘PROS’ of buying a car using Hire Purchase:

• Only a low deposit is invariably required

• Equal monthly payments and fixed interest rates help make budgeting easier

• No mileage restrictions (unlike a PCP)

• That feeling of ‘bliss' when you finally take ownership of the car and no more monthly repayments are required.

The ‘CONS’ of buying a car using Hire Purchase:

• Monthly instalments are higher than PCP deals (because you’re financing the whole amount of the vehicle - not a portion)

• Failure to make payments likely to see car repossessed (meaning you’ll lose all money already paid).

• No modifications can be made on the car without permission from the finance company (until you are the legal owner)

• If you leave the contract early, penalties are usually payable

Can I sell or part-exchange a car with outstanding Hire Purchase (HP) finance?

This is without doubt the most frequently asked question. The short answer is ’no’ (because it's not yours to legally sell until the finance is settled)…but that doesn’t mean you have to be ‘stuck' with a car you no longer want or need.

To sell or part-exchange a car with outstanding HP finance, you simply have to end your agreement early, which involves requesting a ’settlement figure’ (which will invariably include an early-repayment penalty).

From there, you have the option of ‘settling' the remaining finance privately...then it will be yours to legally sell.

But part-exchanging your vehicle with a dealership on a new car is invariably easier, because they will do all of the ‘legwork’ for you and it can be possible to smooth any ’negative equity’ into your new deal.