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A Quick Guide To Buying a Car Using Hire Purchase

Guide To Buying a Car Using Hire Purchase

If you are buying a car there is a very good chance that you will need to borrow to be able to do so. This is far from unusual. In 2023, 79% of people who bought a new car in the UK used financing.

Over the past decade or so a lot of those consumers have used a PCP (Personal Contract Purchase) to buy or lease their vehicle. But the oldest form of car finance, Hire Purchase remains popular. Below we look at why that is and how you can work out if it is right for you.

What is hire purchase?

But before we do that, let´s first look at what hire purchase is and how it works when you use it to buy a car. The term refers to an arrangement that is made between the buyer and seller where the seller pays a deposit and pays the balance in monthly repayments. In the United States, this form of agreement is known as an instalment plan. It is commonly used to purchase expensive goods like cars and has been widely used for over 80 years.

The buyer only becomes the full owner of the vehicle once the final payment is made. But their equity grows with each monthly instalment.

What are the pros of hire purchase for car buying?

Using HP to buy a car has several advantages :

  • The agreement is easy to understand.
  • Most dealers and car finance firms provide HP-style products.
  • The interest rate is fixed.
  • There are no usage limitations, for example, a mileage restriction which would normally be part of a PCP or lease agreement.
  • The car does not have to be kept in pristine condition like a lease or PCP vehicle would need to be.
  • Even people with a relatively poor credit rating can find a firm willing to make an HP agreement with them, although they will pay more interest than someone with a good credit rating would.

What are the disadvantages of hire purchase?

As you can see it is a good product, but it does have some disadvantages, including :

  • Full ownership of the vehicle does not pass to the buyer until the final payment is made.
  • Because the buyer does not fully own the car, they are rarely allowed to make changes to the vehicle.
  • Missing payments will result in the car being repossessed.
  • Late payments will negatively impact your credit score.
  • The monthly repayments are often higher than they would be if you were to use a PCP but that does not necessarily mean that the vehicle will end up costing you more overall

Things to look out for

All forms of financing come with potential pitfalls. But once you know what they are you just need to look out for them.

A larger end-of-the-agreement payment

Most of the time the last payment is more or less the same as the previous ones, but not always. To make the deal look a little sweeter some firms allow you to make smaller monthly payments and pay a bigger one at the end to cover the difference. This is fine, even advantageous, as long as you are expecting the last payment to be bigger.

Extra charges if you pay off the loan faster

If your financial situation changes you may want to pay off your loan faster. Often, this turns out to be a good idea because you will pay less interest. But you need to be aware that you may have to pay a charge to be able to do that. In some cases, the charge can be nearly as high as the interest that you do not end up paying. So, you may not save as much as you thought.

Also Read: Car Rental Europe: What You Should Need to Know Before Hiring

If you think that a hire purchase agreement is right for you, go online and use a car finance calculator to gain an understanding of what your monthly payments would be. Once you have done that and know roughly how much you can afford to pay for a vehicle you can go out, find a car, and secure finance for it.