Buying a car, whether it’s brand new or used, can be a big expense.
A hire purchase agreement, otherwise known as HP, can help you spread the cost of the car making it more affordable to get on the road.
But you should be aware of the possible downsides too.
If you’re wondering whether hire purchase is the right option for you, it might not always seem very straightforward.
So we’ve set out the advantages and disadvantages of buying a car through HP, giving you everything you need to know, so you can make an informed decision.
What is hire purchase and how does it work?
Hire purchase is a type of car finance that spreads the cost of the car out over a set period of time.
Once you’ve made the final payment, the car is yours. Until then, it belongs to the finance company and essentially you’re hiring it while you pay it off.
Usually, at the start of the agreement, you have the option to put down a deposit. Here at Hippo Leasing, all our HP deals come with a £0 deposit option.
After that, the remaining balance plus interest is split into a series of fixed monthly repayments.
The larger the deposit you can afford to put down, the less you’ll have to repay, and your monthly payments will therefore be lower.
The term of a HP agreement generally spans over two to five years – depending on your preference and budget.
If you choose to go for a longer term, the cost will be spread out further and you’ll have lower monthly repayments. However, remember, this way will also increase the amount of interest you pay overall, as you’ll have the finance for longer.
Once all the repayments have been made, the car is signed over to you and you become the legal owner.
With some agreements, there may be a small repayment fee – also known as an option to purchase fee – due before it becomes legally yours. This is usually around £100 – £200 but it does vary, so it’s worth asking about upfront.
Hire purchase: The advantages and disadvantages
Hire Purchase is a popular way to finance a new or Approved Used car for many reasons.
If you don’t have immediate funds to hand, a HP agreement means you can still get a car and get out on the road, while spreading the cost in a way that suits your budget.
However, it’s important to weigh up both the pros and cons before you enter into an agreement, so you can be confident you’re making the right decision.
Advantages of hire purchase
Spreading the cost
A car is an expensive purchase, and in many cases having a readily available lump sum of cash to buy one isn’t possible.
Hire purchase means the payments can be spread out over time, making buying a car more affordable.
Option of a newer, higher specification car
With a hire purchase agreement, it becomes possible to afford a higher specification car that may have been previously out of your budget.
Although you’ll have to pay back the full value over a number of years, you get to drive it straight away.
Fixed monthly repayments
When you take out a hire purchase agreement, the interest rate is fixed from the time you start the contract.
That means you’ll pay the same amount every single month, making it far easier to fit in with your monthly budget.
Reduce repayments to fit your budget
Naturally, the more expensive the car, the bigger your repayments will be, and vice versa. However, there are a couple of ways to reduce your monthly repayments.
Firstly, paying a bigger deposit will reduce the overall amount and interest you need to pay back.
Having flexible repayment terms – from one to five years – means you can also lessen the monthly amount by choosing a longer term.
Own the car at the end of the agreement
After making the final payment, the ownership of the vehicle will transfer from the finance company to you.
Unlike a lease deal – where you never own the car – or a PCP agreement where you need to make a final lump sum payment at the end of the term to purchase the vehicle, with a HP, once your payments are done, you’ll have full ownership of the car with no more obligation.
While some leasing and financing options come with mileage or conditional restrictions, hire purchase doesn’t, as the car is due to be yours once the agreement has ended.
However, it’s important to remember that until the car is fully repaid, it doesn’t legally belong to you, so ensure you read your contract before making any modifications.
It can be paid off early in most cases
Most Hire Purchase agreements will allow you to pay your finance off earlier. So if you want to settle your agreement, either partially or fully before the end of the term, you could make early repayments.
Some, however, will only allow you to do so after a certain amount of repayments.
Get accepted with less than perfect credit
Hire purchase is the easiest type of car finance to get accepted for. So if you’re worried about your credit rating affecting your chances of approval, hire purchase may be the best option for you.
Disadvantages of hire purchase
The car does not belong to you until you’ve made the final payment
Hire purchase is a secured loan, meaning the money borrowed is secured against the car.
This means if, for whatever reason, you can’ keep up with repayments, the finance company can take the car away.
Not only will this leave you with no car, but defaulting on the loan can also have a damaging effect on your credit score.
Higher cost than purchasing outright
Interest will be added to your monthly payments, making hire purchase more expensive than if you paid for the car in full upfront.
And while the repayment term can be flexible, the longer you take to pay the money back, the more interest you’ll pay on top.
Interest rates are based on credit rating
Generally, to get the best interest rates on a hire purchase agreement, ideally, you need to have a good credit rating.
Those with poor credit ratings can often find that they’re offered a higher interest rate and over the duration of the term, that can all add up.
Missing or making late payments could affect your credit score
A hire purchase agreement is a type of credit, so it’s usually reported to the major credit reporting agencies.
This means if you fail to make a payment or make it late, it could be reported and therefore have an impact on your credit score.
Missing and late payments stay on your file for up to six years and are visible to lenders searching your report, so can have an effect on your borrowing in the future.
If you have any concerns about how hire purchase can affect your credit score, our team will be more than happy to answer any questions.
Is Hire Purchase the right option for me?
While hire purchase is an affordable way to drive the car you want right away without having to find a large lump sum of money, it’s not always right for everyone’s circumstances.
By considering the advantages and disadvantages, as well as what you want from a finance deal, you can make an informed decision.
Advantages Of HP
- Fixed monthly payments
- Choose the length of your agreement term (from one to five years)
- Own the car at the end of the agreement
- No mileage restrictions
- Early repayment available
- Easier acceptance compared to other types of finance
Disadvantages Of HP
- Risk of the car being repossessed if you fail to keep up with payments
- Cannot sell the car until you have paid off the finance
- Can be expensive for short-term agreements
- Interest rates depend on your credit score
- Monthly repayments are generally higher than PCP or PCH
If you’d like to find out more about hire purchase or to see if it works for you, speak to a member of our team who can answer all your questions.
Alternatively, if you like the sound of hire purchase and want to see if you’ll be approved without affecting your credit score, you can use our quick and easy online application form.