Hire Purchase (HP) agreements are a popular car finance option for anyone looking to buy a used car.

Whilst HP agreements are a relatively simple way to finance your next used car, it’s important you understand what’s involved in order to make sure it’s the right decision for you.

So how does hire purchase work and what does it mean? In this article, we’ll take a closer look at this type of finance and what you can expect when taking out a hire purchase agreement.

 

What is HP car finance?

Hire Purchase agreements are a type of car finance that allow you to spread the cost when purchasing a vehicle.

HP car finance agreements can be used on both new and used cars, giving you a wide range of choices depending on your needs and preferences.

Rather than paying the entire purchase price in a single lump sum, you’ll be required to pay a deposit followed by fixed monthly instalments over an agreed period of time.

Once all the instalments have been paid, you will have the option to pay a small fee to transfer the ownership of the car from the finance company to yourself.

Following this payment, you’ll then become the legal owner of the vehicle.

How does Hire Purchase work?

With Hire Purchase agreements, you’ll begin by paying an initial deposit. Most lenders usually require at least 10% of the vehicle’s value. However, if you can, paying a higher deposit will help to reduce the monthly payment amount.

The remaining value of the car will then be paid off in monthly instalments, usually over 12 to 60 months. You will also be charged interest on top of these monthly payments. The amount will differ depending on your personal circumstances and the finance product you choose.

As you approach the end of your payment term you will have the choice to pay an “option to purchase” fee to become the legal owner of the car. This is usually between £100 and £200 but it can differ depending on the finance product and some lenders charge much less.

HP finance calculator

Shopping around for the best deal can feel overwhelming, particularly when there are so many products available.

At Motors, we’ve partnered with CarMoney to help you find the most suitable car finance for your needs. Use our Car Finance Calculator to search a panel of finance providers to find the right option for you.

 

What are the advantages of Hire Purchase?

Spread the cost of your car purchase

One of the main advantages of HP finance is the flexibility to spread the cost of a vehicle rather than paying a lump sum upfront. Hire purchase agreements can be used on new and used cars, giving you a greater range of options at affordable prices.

Easy budgeting with fixed payments

With HP agreements, your monthly instalments are fixed so you will not experience fluctuations as bank interest rates rise, meaning you won’t be affected by any sudden price increases.

No mileage restrictions or balloon payments at the end of the contract

Unlike PCP, you will not be required to pay a balloon payment to become the car’s legal owner and you will not be limited by mileage restrictions or fines for damage not considered fair wear and tear.

Hire purchase can be used to purchase older vehicles

Because Hire Purchase agreements are not based on any future vehicle values, and they don’t have mileage limits, they can be used to finance the purchase of older vehicles that aren’t eligible for PCP finance.

 

What are the disadvantages of Hire Purchase?

Like any financial product, failure to keep up with monthly payments could result in penalty fees or in worse cases, repossession.

HP agreements are provided on a fixed-term basis and you must ensure that the amount you need to pay is achievable over the full term.

Another disadvantage is that you’ll pay more by financing the car as payments will include interest charges. If you have a poor credit score, you might have to pay more in interest fees.

Typically, HP instalments are higher than PCP instalments as they will be financing the whole amount of the car rather than paying the expected depreciation of the vehicle. If you have no intention of owning the car at the end of the agreement, PCP finance might be a better option for you.

FAQs

Can you pay off an HP agreement early?

It is possible to pay off a Hire Purchase agreement early, however, you will likely encounter some early repayment fees.

This amount will vary depending on the financial lender but it is usually equivalent to a couple of months’ worth of interest.

Do you need good credit to get HP finance?

Hire Purchase can be a good option for those with poor credit scores. This is because the amount you borrow is secured against the car itself rather than basing it off your credit score.

Whilst a low credit score might not stop you from getting a hire purchase agreement, you might expect the interest rate to be higher.

Do you own the car after HP finance?

Once you have paid off the final instalment and the “option to purchase” fee, you will become the legal owner of the car. The car is then either yours to sell or keep.

Does Hire Purchase improve credit score?

It sounds counterintuitive but having a HP agreement can have a positive effect on your credit score, providing you are successful in making the payments on time.

However, delayed or failed payments will harm your credit score and this could reduce the likelihood of securing financial products in the future.

What's the difference between used car HP and PCP?

With HP finance you will borrow the entire value of your car minus the deposit. With PCP, you only borrow a portion of the total amount as you will be expected to pay a balloon payment at the end of your agreement if you wish to keep the car.

For this reason, HP monthly payments are usually higher than PCP payments. HP agreements usually don’t involve fines for wear and tear or a mileage limit as it is likely you’ll become the legal owner of the car at the end of the agreement.

Where can I get HP finance from?

Looking for HP finance quotes is easy and you can find various products online or when you visit a dealership. At Motors.co.uk we’ve partnered with CarMoney to help you find the most suitable car finance agreement. Use our Car Finance Calculator to get a quote today.

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Steve Edwards
A certified car nerd who has been creating car content since 2015, Steve is much happier talking about used cars under £15,000 than the latest hypercar. He’s been advising friends and family on their next used car purchase for as long as he can remember – handy experience for his current role in charge of content at MOTORS. As a father of two young kids who covers a lot of miles, he tends to value safety, practicality and comfort above all else, so he has a soft spot for massive SUVs and premium estate cars.
Article published July 28th, 2023