Is Hire Purchase the Cheapest Way to Get a Car on Finance?

One of the most popular ways to finance a car is through a hire purchase car finance agreement. Hire purchase is a straightforward way to finance a car of your choice. Other rival car finance agreements such as PCP can benefit from lower monthly payments but the structure of this type of agreement means there is a large balloon payment owed at the end of the deal if you wish to keep the car. PCP is a popular choice, but the low monthly payments don’t mean that it is the cheapest way to fund your next car purchase. Hire purchase can be one of the most cost-effective forms of car finance. The guide below looks at everything you need to know about hire purchase and how it works.

How does hire purchase work?

Hire purchase is a straightforward way to spread the cost of your chosen car into affordable monthly payments. You can choose whether you pay a deposit or not and your loan amount equals the value of the car you choose, with interest is included in your monthly payments. Interest rates are determined by the lender and can be dependent on your credit score and other factors. At the end of a hire purchase agreement, you can choose to pay the final option to purchase fee and keep the car or you may be able to hand the car back to the dealer. If you wish to cancel your hire purchase agreement early, you can do so through voluntary termination. However, if you haven’t paid off 50% of the amount owed, you will need to pay the difference before you can cancel early.

Which cars can you get on hire purchase?

There is so much choice on the market for hire purchase cars today. You can finance a new or used car through hire purchase, but it can be the most cost effective on second hand cars. Due to the structure of hire purchase, a higher loan amount such as a newer car means higher monthly payments. If you choose to spread the loan term over a longer period, it can help to make your payments lower, but you spend longer paying interest which may make the deal more expensive than it needs to be. Choosing a lower loan amount such as a cheaper car can make your deal more affordable and easier to pay back.

Benefits of hire purchase cars:

There are plenty of benefits to getting a car through hire purchase. From fixed monthly payments to no mileage restrictions, there could be a hire purchase deal that is right for you!

• Fixed payments. Over the course of your hire purchase deal, you will pay fixed monthly payments with a fixed interest rate. This means throughout your agreement you will always pay the same amount and makes it easy to budget for each month.
• Don’t have to own the car. Usually, drivers choose HP finance because they can hire the car from the lender over the term and then own the car at the end of the agreement. There is a small option to purchase fee which needs to be made before ownership can be acquired. However, this is usually a similar amount to the monthly payments you have been making already. If you don’t want to own the car, there are lenders who allow you to hand the car back at the end of the deal too.
• Bad credit friendly. It can be harder to get accepted for poor credit car finance but hire purchase can be your best bet if you’re struggling to get an approval. HP is a form of secured loan which means the lender owns the car throughout the agreement until the final payment has been made. A bad credit score usually indicates bad financial management or missed payments in the past. If you fail to meet the repayment deadline for your HP deal, the lender can use the car as collateral and take it off you.
• No mileage restrictions. Unlike PCP deals, there are no milage restrictions associated with hire purchase agreements. Many drivers choose to return their car at the end of PCP deal so you will need to agree to an annual mileage limit and keep the car in good condition throughout the agreement. If not, you can incur additional charges. However, there are no mileage restrictions or charges involved for HP.

Disadvantages of hire purchase:

After reading the above benefits of hire purchase, you may be wondering what’s the catch? There are a few factors you should consider before getting a car through hire purchase.

• Form of secure finance. If you have a history of making late repayments or not paying at all, you run the risk of losing the car if you default on your hire purchase payments. The lender owns the car throughout, so they have the right to take the car off you.
• Credit score can be affected. Your credit score can actually increase if you make all your HP repayments on time and in full and meet any other financial commitments. However, missing payments or defaulting on your monthly payments can have a detrimental effect on your credit score and serious affect your chances of getting finance in the future.
• Interest rates based on credit circumstances. Lenders can set higher interest rates based on your credit score. A lower credit score can mean you are offered a higher interest rate to help secure the deal and make sure you are serious about meeting your repayments on time and in full.