What Is A Hire Purchase Agreement?

Date Posted 13th April 2017
Read Time 4 min read
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Hire Purchase agreements are finance options that allow you to purchase your car through easy to manage monthly payments. You can pay an initial deposit followed by fixed monthly payments. You will not receive any surprise increases, allowing you to budget effectively.

What is Hire Purchase?

Hire Purchase is a finance agreement that allows you to purchase your car over a period of time. A HP agreement is split into two parts: the initial deposit followed by a period of monthly payments. At the end of the agreement, you own the car and you have the choice to keep the car or part exchange and upgrade. These agreements usually run for between 24-60 months with most coming in at 48 months.

When the agreement ends you will own the car having paid off the value of the car in full. You will not be able to hand it back. However, you can part exchange it and upgrade to a new vehicle.

How does a HP agreement work?

A Hire Purchase agreement works by you paying an initial deposit, which is split into three options.

  • Deposit worth three months of monthly payments
  • Deposit worth six months of monthly payments
  • Deposit worth nine months of monthly payments

The larger the deposit you pay, the lower your monthly payments will be. Your monthly payments are calculated by the value of the car when you sign the agreement, how long your HP agreement will last and how much interest you will pay on top of the car’s starting value.

Your credit score is an important factor when it comes to calculating how much interest you will pay. The better credit score you have, the less interest you will pay. For those of you with poor credit scores, HP agreements are available through bad credit leasing, but you will pay a higher form of interest.

0% interest agreements are available from some lenders on brand new cars.

How does a HP agreement end?

A Hire Purchase agreements end one way, but gives you more freedom to decide what to do next.

  • You own the car
  • You can part exchange and upgrade
  • You can pay a settlement fee to end the agreement early

You will own the car. This gives you exclusive freedom with what you want to do next. You will be the legal owner and therefore can just keep the car. However, you do not own the car until you make that final payment. For the duration of the agreement, the car is the property of the finance company.

There is another way. If you do wish to change your car, you can part exchange it for another and upgrade. Your car will be valued and you can use that as your deposit on a new car, which you can also get on a Hire Purchase agreement.

Hire Purchase Diagram

Dependent upon how long your agreement is, you may choose to change your car before the agreement is up. You cannot sell or use your current car in a part exchange without the permission of the finance company. You can pay the end the HP agreement early in what is known as a settlement fee.

Settlement fees cover the cost of any unpaid instalments and interest you have remaining. These can be paid by you or some dealerships and lenders offer to pay the settlement fee for you in your new agreement.

For example:

  1. Your car is worth £10,000 and your settlement fee is £3,000.
  2. The dealership can choose to pay off the £3,000
  3. Then put the remaining £7,000 towards a new model.

If HP sounds like the right agreement for you and you are happy, we have a wide range of cars available to view here.