What is Hire Purchase (HP) finance?

What is Hire Purchase?

Hire purchase (HP) lets you buy your car via a series of monthly instalments with no final payments. Here’s how it works.

There are various ways to finance a car, but hire purchase, often known as HP, is one of the most straightforward. You pay a deposit for the car and then a set number of monthly payments, and then you own the car. Unlike a Personal Contract Purchase (PCP) – another popular method of financing – you don’t have a large final payment at the end of the contract.

Easy. So why isn’t it the method that all car-buyers use? Because of the way that HP works, monthly payments can be considerably higher than with PCP. With HP you’re paying for the entire value of the car, unlike PCP where you pay for just the depreciation.

Many PCP customers reach the end of their contract and then change the car for another, rather than pay the final “balloon” payment. But if you want to keep your car, then HP could make more sense, because the chances are you’ll be paying less overall to own it than you would with PCP.

If you have the financial resources to front up the deposit and the higher monthly charges, then HP is a more cost-efficient way of buying a car. However, if you need your monthly payments to be as low as possible and you don’t want to keep the car, then other finance options, such as PCP or leasing, might be better options for you.

Hire purchase: Pros and Cons

Pros of hire purchase

• Cost of car spread across monthly payments
• Less interest than PCP equivalent
• No big final payment

Cons of hire purchase

• Higher monthly payments than PCP
• The car isn’t yours until the final instalment is paid
• You could pay over the odds if car value drops more than expected

How does Hire Purchase work?

The actual process of buying a car through hire purchase is simple. The cost of the car is split – you pay a deposit and then the balance is split into equal monthly payments for a set length of time.

So far, so similar to PCP. But while at the end of a PCP agreement you can pay the outstanding balance in a lump sum to keep the car, or hand it back, HP sees you own the car outright at the end of the contract.

HP deals let you change the amount you pay as a deposit and how long the contact is for. The more deposit you pay, the lower your monthly instalments, and the less you’ll pay in interest. Another way to lower your monthly payments is to increase the length of the contract, although the longer the contract, the greater the amount of interest you’ll pay overall. Low-deposit and no-deposit HP options are often available if you don’t have the cash to pay up-front.

How are Hire Purchase payments calculated?

The process of working out HP costs is very straightforward. Over the length of the contract you pay for the cost of the car, plus interest, split across a deposit and equal monthly payments.

Let’s say the car costs £20,000 and you put down a £2,000 deposit. That leaves £18,000 to pay. If you go for a three-year contract, it would cost you £500 a month, plus interest.

Some companies will offer a deposit contribution, where either the car manufacturer or dealer pays a portion of your deposit, reducing the amount you have to pay. You’ll also find low-interest deals and sometimes 0% interest deals as incentives to buy.

One thing to watch out for is high-interest deals. You might spot a deal with a big deposit contribution but high annual percentage rate (APR). But that could end up costing you more than a deal with no deposit contribution and lower interest. It’s important to work out the overall costs.

Do I own the car if I buy with Hire Purchase?

Yes, you will own the car if you buy using HP, but only at the end of the contract when you’ve paid all the monthly instalments. Until then, the car is the property of the finance company, which means you can’t modify it or sell it without the lender’s permission.

Incidentally, if you buy on a PCP deal you won’t own the car even at the end of the monthly payment agreement – unless you pay the final balloon payment to own it outright.

Which finance method is best? HP vs PCP vs Leasing

Which type of financing is best for you depends on your circumstances and whether you want to own the car.

If you don’t plan to keep the car at the end of your finance contract, then leasing is likely to offer the most affordable monthly payments, but you won’t have any option to own the car – you’re essentially renting it, and you hand it back at the end. Keep in mind that it’s likely harder and more expensive to end your contract early than with PCP or HP.

PCP is sort of a halfway house. If you hand the car back at the end of the contract then that’s the end of it, but unlike leasing you have the option of a final payment to own the car. This is set out at the start of the contract and is based on the expected value of the car. While nothing is guaranteed, the actual value of the car at the end of the contract could be higher – should you choose to hand the car back, you can use any extra value of the car over the remaining finance balance to put towards the deposit for your next car, which could reduce your monthly payments.

With both PCP and leasing you have to keep within a set mileage to avoid extra charges at the end of the contract. If there’s any damage to the car (other than wear and tear), you’ll have to pay a charge for that, too. The details of what’s acceptable will be outlined at the start of your agreement. Both PCP and leasing offer lower monthly payments than an equivalent HP deal. This is because those payments don’t cover the full cost of the car. If, on a PCP deal, you do want to buy the car you’ll likely have paid more interest than you would with HP because you’re paying the outstanding balance off more slowly. When comparing PCP and HP deals, remember to include the cost of the optional final PCP payment in your calculations.

Can I cancel a Hire Purchase contract?

If you want to, you can hand back the vehicle early with hire purchase. However, you’ll have nothing to show for your payments and, depending on the value of the car and the outstanding balance, you may need to make an extra payment. This is because for much of the contract the car is worth less than the remaining balance, especially towards the start of the agreement.

Once you’ve made half your payments you have an option called Voluntary Termination, which is part of the 1974 Consumer Credit Act. This lets you hand back the car without additional cost after this point. Half, by the way, refers to the total amount payable, including the deposit and monthly payments.

If you haven’t yet paid half, you can enable Voluntary Termination by paying a lump sum to meet the halfway mark. Once again, this would leave you without a car to show for your payments thus far.

Should you find yourself in a financial position to pay your full contract off early, you’ll own the car and will usually pay less interest than if you’d stuck to the original monthly payment schedule. You’ll be able to get a total settlement figure from your lender to see how much this will cost at any point.

Can I buy a used car on Hire Purchase?

Yes, you can get HP deals on both new and used cars. It works in the same way as with a new car and if you plan to keep your used car for a long time, it could be your best option. Your deposit and monthly payments will cover the full cost of the car and you’ll likely pay less in overall interest than you would with a PCP deal. At the end of the contract you’ll own the car and can do what you want with it – sell it, keep it or trade it in.

Hire Purchase is a common type of finance on older cars, because it’s much easier for lenders to calculate. A PCP deal requires an estimation of the car’s likely value at the end of the agreement, which on an older car is much more difficult.

What are the best Hire Purchase deals?

Manufacturers and dealers are keen for you to buy a car, so they often incentivise customers with discounts and low-interest-rate deals. New cars in particular are often subject to 0% APR deals, which can offer a substantial saving because there’s no interest to pay. That said, a used car will usually cost less per month even if interest is charged.

However, interest-free credit doesn’t usually include the same discounts that you’ll often find on deals that charge interest, so the actual price you pay could be higher. Just because a deal has 0% APR doesn’t mean you’;re getting a good deal – always compare it with other quotes with the same kind of finance, deposit and contract length to work out the overall cost.

You’ll get lower monthly payments by increasing the amount of deposit that you pay. This lowers the total cost and reduces the amount of interest you pay, because you have a smaller balance remaining. Increasing the contract length will also reduce your monthly payments, but will mean you pay more interest overall.

Do I need GAP insurance with Hire Purchase?

GAP (Guaranteed Asset Protection) insurance is cover for the risk that, if your car is written off, you’re left with no car but still have finance payments outstanding.

It’s particularly useful on a new or nearly new car, because the value of such cars drops more quickly than the rate of your repayments. If you have a crash, the regular insurance payout will only cover the car’s value at the time, which could be substantially lower than when you bought it. That leaves a gap between the money you’ll get through your car insurance and the amount you owe the finance company. GAP insurance covers that deficit. 

You don’t always need GAP insurance with an HP agreement. Comprehensive car insurance on a brand-new car will often replace it with another brand-new car within the first year, after which the gap between the car’s value and your repayments is likely to have closed. And if you buy a used car with a deposit of around 10% or more then the car may never be worth less than the amount you owe, meaning you wouldn’t need GAP insurance. Such cover is generally more important with PCP deals than HP, because you pay off the finance balance more slowly.