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.
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
- 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
- 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
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