Car finance: the Hire Purchase explained

Car finance advice
Car finance: the Hire Purchase (HP) explained

We regularly look at car finance issues here at The Car Expert, and have explained products like the personal contract purchase (PCP) before. In this article we will look at the original car finance product, the hire purchase (HP).

The hire purchase is considered the original car finance product, and it is fairly straightforward to understand and manage. It is usually offered by the dealership, and if it is a franchised dealer then the finance is usually provided by the manufacturer’s own finance company. Other providers also finance hire purchase agreements for independent dealerships, and also as fallback providers for franchised dealers if the customer is not eligible for manufacturer finance.

How does a hire purchase work?

Once you have found the car you want to buy, you decide how much money you want to put in up front (the deposit), and how much you want to borrow.

You repay the borrowing, plus any interest and fees, over a term that is usually 1-5 years, although there are some lenders who will allow a longer term.

The APR (annual percentage rate) is fixed for the duration of the term, so your payments will be fixed for the life of the agreement, regardless of what happens in the marketplace. This is good for your budgeting, as your monthly payments will not change if interest rates start to go up.

Who owns the car in a hire purchase?

The finance in a hire purchase is secured against the car. This means that until the agreement is paid off in full, the car remains the property of the finance company.  Once you have paid off everything, including any fees to complete the agreement, you officially become the owner of the car.

Car finance hire purchase payments

Have you finished paying for it? It doesn’t belong to you until you have paid off 100% of the debt.

Although you sign the contract to purchase the car from the dealership, the dealer invoices the finance company for the vehicle. The finance company buys the car from the dealership and authorises you as the keeper of the car.  You then collect the car from the dealer and spend the next few years paying off the finance company.

This is different to a personal loan from a bank, which is an unsecured loan. With a bank loan, you borrow the money from the bank and spend it however you like, so you are the owner of the car right from the beginning.

As the person taking out the finance on a hire purchase, you will be listed on the V5C (logbook, or registration document) as the keeper of the car, meaning that any speeding fines or parking fines will come to you. However, you are not allowed to transfer the vehicle to anyone else or sell the car without the finance being paid off – because it’s not your car to sell. Again, this is different from a personal loan where you can sell the car or even burn it to the ground if you like – the loan is not secured against the car and you have to repay the loan regardless of what you do with the car.

Insurance requirements on an HP

The finance company will require you to have fully comprehensive car insurance on the vehicle. Usually, the finance company will insist that the insurance is in your name, although you can list other people as named drivers. In fact, the finance company will usually insist that all of the documentation (hire purchase agreement, vehicle contract, insurance, V5C logbook) are in the same person’s name.

Hire purchase – the pros and cons

Pros:
  • usually a low APR on new cars
  • fixed monthly payments
  • loan is secured against car, so you can’t be forced into bankruptcy if you can’t afford the payments
  • convenient to arrange – the dealer will usually do all the work
  • no maximum deposit, so you can pay a large chunk in cash and only borrow a small amount if you want
  • good opportunity to settle the agreement early if you need to
Cons:
  • usually a high APR on used cars, meaning you are paying a lot of interest
  • relatively high monthly payments compared to a PCP or leasing
  • because the loan is secured against car, it does not belong to you until everything has been repaid
  • not usually a lot of choice of lenders, unlike a personal loan
  • loan must be settled in its entirety when selling the car, which can sometimes be tricky if you are selling privately

Next page: When is an HP the best type of finance and what should you look for?

Discussing car finance, like a hire purchase or PCP, in a car showroom

Stuart Masson
Stuart is the Editor of The Car Expert, which he founded in 2011, and our new sister site The Van Expert. Originally from Australia, Stuart has had a passion for cars and the car industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

28 Comments

  1. I got finance of a comp called startline now I cant afford month payments now I want to give it back had it for 1yr 5yr I sopost to have it for

  2. Stuart Masson

    Hi Chris. You should call the finance company and explain your circumstances. They may be able to offer alternative payment arrangements, or you may have to sell the car and settle the finance. You won’t yet be in a position to voluntarily terminate the agreement.

  3. Am in the process of purchasing a used car (x demo). Am part exchanging and putting a deposit down, the Car company are also contributing £1k if I sign up for the PCP arrangement. The Sales Rep has also said that once I have signed the agreement for the PCP I can also cancel with 2 weeks. Could you please confirm that this is correct ?

    Thank you

  4. Stuart Masson

    Hi Christine. Yes, this is correct – have a read of our article on deposit contributions.

  5. We got a Mini on Hp in which we have recieved our second statement (first one didn’t appear) which caused me to question it with mini financial. Basically after 1year of paying monthly, we have payed £2.47 off the total amount as all the interest for the car (£4000) was added onto the beginning of the term therefore we have only paid interest. Is the normal and right as I haven’t seen it before? I’m sure it can’t be right as if we wanted to settle early then we have paid a lot of interest?

  6. Stuart Masson

    Hi Anne. Yes, that sounds about right. If you do decide to settle the finance agreement early, the interest will be recalculated to reflect the fact that you are not running the full term, so you would save some money compared with running the term to its normal conclusion.

  7. Hi Stuart
    I recently signed a finance document for a vehicle however the finance company have returned the document as the signature did not match, I have spoken to the salesmen who has been our first point of contact and he advised that the documents need to be signed again so therefore the agreement is not live, am I correct in thinking that they is no legal obligation for me to carry on with the purchase and I can ‘pull out’ of the deal?

  8. Stuart Masson

    Hi Andy. The finance agreement is separate to the vehicle agreement. You can choose to cancel the finance agreement up to 14 days after the contract is activated, but that doesn’t change the purchase of the vehicle itself – you would need to find another way to pay for it. Have a read of our article about buying a car and then changing your mind.

  9. I did wonder why so many dealers are offering finance to the extremes.

    Really detailed topic by the way

    Regards

    Dave

  10. HI Stuart could you please advise me due to personal circumstance we possible need to upgrade our car, so took it to see what offers we could get. I am 18 months into a 36 month pcp deal and just found out that I am a negative equity. my settlement figure is £10942 and get values for my car of £8300 to £8600. my mileage allowance is 10,000 pa and the vehicle has only done 2500 miles can you give me some options and where I stand.

  11. Stuart Masson

    Hi Mark. That sounds about right. Your options are to put up with this car for a while longer, at least until you clear your negative equity (so probably another 6-12 months), or sell it privately (which may yield enough to clear the settlement figure with no negative equity), or suck it up and pay out the negative equity before you start working out what you want to buy next.

  12. Hi is it normal for mainly interest to be taking initially on hire purchase? I’ve gone to get a settlement figure 24 month into a 36 month contract and they say they can only deduct interest which is hardly anything as they took most of it already…

  13. Stuart Masson

    Hi Julie. If you are settling two years into a three-year agreement, you should save about a third on the total interest payable. The settlement figure is not the same as your outstanding balance, because they have basically already taken three years interest from you within two years, so your settlement fee would be reduced accordingly.

  14. Hi, my son took out a loan for a used vehicle over 4 years on Friday of last week, today his contract has been terminated :-(, he is obviously still within his “cooling off” period, where does he stand, is he able to just take the vehicle back?

  15. Stuart Masson

    Hi Jonathan. Your son’s finance agreement will have a 14-day cooling-off period, but that doesn’t apply to the vehicle purchase – it just means he can cancel the finance agreement and pay cash for the car instead. The car contract has no cooling-off period, so your son has no legal option to hand the vehicle back. For more information, have a read of our article about changing your mind after buying a car.

  16. Hi Jonathan,

    My partner’s ex took a car out on finance for him. The log book is in his name but the finance is in her name. 80 per cent of the car finance has been paid off by him. (Deposit and monthly repayments)What legal rights has he got as she has threatened to cancel the finance agreement.

  17. Stuart Masson

    Hi Sharon. That’s not a very clever threat from the ex. The finance is in her name and therefore the finance company will come chasing her, not your partner, so theoretically he could simply disappear with the car and she would still have to keep paying for it. It’s called an accommodation deal and finance companies generally won’t allow them anymore (although if your partner and ex were married at the time then they wouldn’t have minded).

  18. Hi Stuart, please can help advice me on what to do. I got an hp on a car and also used my old car for a part exchange or deposit. But after 9hrs of getting the car which was the next morning. The car developEd a fault. An LDP light which shouldn’t stay on was staying on, therefore a malfunctinon Period! This caused the car to crawl to a hurlt and when moving drinks a lot of diesel and driving conditions of the car were poorly performed. I called dealer, who weren’t as helpful. I was very upset and I called the rac who came and found some faults and turnEd or wiped off the codes from the system. This helped but did not cure the problems so am not happy and want the dealer to change the car or cancel the contract. But they said they can’t that I can manage or get it repaired. I called up the manufacturer of the car and reported this as well as speaking to my hp finance company who said that I cannot cancel. That i am not allowed to cancel, but it clearly says on the contract I have 15 day if I change my mind to cancel and also now it’s got a fault, should give me even better chance. But they said they will investigate and get back to me in 14-15 days but in the mean time I should get it diagnosed by the manufacturer first and then depending on how seriously and costly will determine if I can reject the agreement contract. So now I found a car in want and I want to know my rights or what should I do? And is there any law that says I must give chance for repair?
    Thank you.

  19. Stuart Masson

    Hi Veronica. You should be covered by the Consumer Rights Act, which enables you to reject a new or used car if it has a significant fault. For more information, have a read of our article about rejecting a car under the Consumer Rights Act.

  20. Hi, Stuart

    I am on HP and the bank has been deducting a certain amount for insurance whereas I have been paying for another insurance and when I made enquiries they told me that it is an extended cover not comprehensive. Please explain fully what is happening because I am confused.

  21. Stuart Masson

    Hi Maite. It is most likely to be either GAP insurance or some form of extended warranty. You will need to look at your original sales contract to see what is on there.

  22. Hi, Stuart

    Thank you for your reply. What I need to understand is that when you are on HP do you need to get your own insurance or what must happen because the car belongs to the Bank until it is paid up. Shouldn’t the bank has to insure it because it is its property until the final payment on it. Please advise me on this aspect.

  23. Stuart Masson

    You are required to insure the car on a fully comprehensive basis for as long as it is in your possession. It will be in the agreement.

  24. My daughter got me a car on finance the car cost 10,000 pounds I traded in my own car for it got 2000 off price so the car cost 8,000 the agreement was 173 pounds a month over 60 months I have one more payment to go of 470 pounds it’s due on the 27th of April I have paid fully comp insurance from day one my name is on the log book all my money gets put into my daughter’s account she is my trustee she is saying now I’ve paid for the car she is going to take it from me and is going to sell it for cash and there is nothing I can do about it as her name is on the finance agreement what are my rights I didn’t think my daughter would be so greedy and do this to me.

  25. Stuart Masson

    Hi Daniel. It’s a difficult situation, as she is probably the owner of the vehicle – even though you are the keeper – so it is probably her car to sell.

    However, if you don’t give her the V5 and don’t give her the car keys, she can’t sell it.

  26. Hi Stuart, I am currently processing the return of my HP car. The finance company are asking for GAP and Alloy wheel insurance to be paid back, is this legal. Thanks Kenny

  27. Stuart Masson

    Hi Kenny. It will depend how the add-on insurances were paid for. The rules for insurances are not the same as for an HP finance product if you want to end the contract early. Are you talking about a voluntary termination or early settlement?

    The insurances can’t be refunded if you cancel them, so if you haven’t finished paying for them then they will need to be paid off.

  28. Hi Stuart, I’m talking about a VT as I have paid half the payments.
    These insurances were added on at the start, so it seems like I’m going to have to pay them. I will ask for a detailed breakdown as I have 30 days to pay from returning the car.

What are your thoughts? Let us know below.

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