Hire Purchase
Hire purchase is very different from a car loan or personal loan. With this type of motor finance, YOU are not actually buying the car, and you won’t own it until the end of the contract.
Instead, a third party – your lender – will buy the car for you, and then you’ll buy it from them in instalments, usually over three or five years.
Although you’re not the owner of the car, you’ll have full responsibility for insurance and maintenance and you’ll have to comply with all the lenders’ terms and conditions (which may include restrictions on where you keep the car, and what you use it for, etc).
You also won’t be able to sell the car unless the lender agrees (since it’s not actually yours!). In some cases, a buyer might be able to take over the hire purchase payments, but that will depend on the terms of your contract.
Hire purchase contracts can be notoriously expensive to get out of, so it’s risky to opt for this type of finance unless you’re certain you’ll keep the car for the full length of the contract.
Another thing to watch out for with hire purchase is the up-front cost: you’ll usually have to make a lump sum deposit payment, as well as cover all the on-road costs for your car (stamp duty, registration, insurance).
You’ll then pay the rest of what you owe in instalments, as with any other form of motor finance. Like a car loan, you may have a choice between equal payments over the full term of the contract or smaller payments with a large ‘balloon’ at the end. Once again, the balloon option comes with pitfalls – the monthly payments will probably be more affordable, but you’ll be paying more interest in total and have to find a way to finance that large final repayment.
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Find your ratesHire Purchase Pros and Cons
Pros
- Since hire purchase is a low-risk option for the lender (they own the car and can reclaim it if you don’t keep up with your payments) this type of motor finance can be easier to access than unsecured options like a personal loan.
- At the end of the contract, you’ll own the car outright, unlike with lease finance – so you’ll have an asset of your own that you can use or dispose of as you wish.
- There are lots of hire purchase lenders to choose from, so you can shop around for terms and conditions that suit you. You may be able to set the term of your loan, the frequency and schedule of your payments, and whether you pay a fixed or variable rate of interest.
Cons
- Until you make the last payment on your hire purchase, your lovely new car isn’t really yours. You’ll have to comply with all the lender’s terms and conditions – which may even include mileage limits – and keep it fully maintained and insured at all times.
- If you need to sell the car early you may run into trouble getting out of the contract, depending on the terms. At the very least, it will make the sale slower and more complicated, and it may come at a high cost if your hire purchase agreement has early repayment penalties (which are common).
- Hire purchase is rarely a cheap option, despite the lower risk to the lender – and the up-front costs of the deposit and on-road costs mean that you’ll need some funds available before you buy, rather than being able to borrow the full value of your car.
Other car finance options
1. Car Loan
Perhaps the most obvious motor finance option is a car or vehicle loan. The key feature of this kind of finance is that it is a secured loan, where you use your new car, motorbike, or other vehicle as collateral.
2. Personal Loan
If you don’t want to use your new car as security for your loan – or if you’re buying a second-hand car that’s more than six years old, you could opt for a personal loan instead to finance your new motor.
3. Mortgage
If you own a property and have built up some equity, you might be able to fund your car purchase by redrawing on your mortgage.
4. Lease Finance
It’s basically a rental agreement – like with hire purchase, the finance company will buy the car for you and then lease it to you in exchange for regular payments over an agreed period.
