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What is Hire Purchase (HP)?

With Hire Purchase, you can buy a new or used car in monthly instalments. Would this work for you? Our guide looks at the total cost, pros and cons, and more details of a Hire Purchase contract.

Last updated on 14 December 2023 | 0 min read

What is Hire Purchase?

Hire Purchase (HP) is a common way of financing the purchase of a car. HP splits the cost of a car into a deposit, followed by a series of equal monthly payments for the length of the agreement.
Here, we’ll talk you through the essentials of HP so you can make an informed decision as to whether it’s the right option for you.

What is HP?

Hire Purchase (HP) is a way to finance the purchase of a new or used car. You’ll usually pay a deposit towards the vehicle, and then pay off the remaining amount in equal monthly instalments, with interest charged every month.

How does Hire Purchase (HP) work?

A Hire Purchase agreement is usually arranged with the retailer you’re buying the car from. You put down a deposit – which you can save up for or cover by part-exchanging your current car – then you pay off the rest of the outstanding balance via monthly payments over a set period of time.
In a Hire Purchase agreement, you don’t technically own the vehicle until you’ve made the final payment. You’re classed as the car’s keeper and the finance company is classed the legal owner of the car until you’ve paid the Hire Purchase loan off and paid the option to purchase fee. As such, you’ll need to keep up with payments or it could be repossessed. As the registered keeper of the car, you’re responsible for insurance, servicing and maintenance, but the finance company is the legal owner of the car until the final payment. For that reason, you can’t sell the car without the permission of the finance company.

Is Hire Purchase expensive?

Monthly payments on Hire Purchase agreements account for the full cost of the finance agreement so they tend to be higher than PCP or car lease agreements, but this can vary and there are deals available.
The amount you pay back each month is fixed – you’ll pay the same amount every month until the contract ends. Unlike PCP deals, which have a final balloon payment, HP payments are the same each month so this can sometimes make budgeting easier. The size of your fixed monthly repayments will often depend on the size of your deposit and the length of your contract. If you pay a larger deposit, your remaining monthly payments should be smaller. Just note that if you take a longer contract and plan to make lots of monthly payments, you may pay more in interest over the duration. Find a balance that works for your budget and make sure you can keep up with the monthly repayments. Dealers and manufacturers may be running special promotions on HP agreements, and you may find they’ll help with the deposit or give 0% APR deals. But make sure you explore your options and work out which offers you the best value by comparing APRs and the total cost of the loan. Don’t simply assume the deal you’re offered is the cheapest, or best for you. Shop around between dealers for finance rates as well as car prices.

Important things to be aware of with HP

There are a few key details to consider when looking at HP contracts:
• You won’t own to car until you’ve made all the payments, but unlike PCP, you don’t have to make a final balloon payment • You’ll have to pay an initial deposit, which may be lower than the deposits required for other finance agreements • HP contracts typically don’t have strict mileage limits or conditions for wear and tear, but you’ll have to keep the car in reasonable condition while you’re its keeper • HP contracts are less flexible than PCP in terms of end-of-contract options, but they provide a straightforward path to owning the car, if you can’t afford to pay for a car in cash upfront

How long do Hire Purchase contracts last?

Typically, Hire Purchase contracts last anything between 12 months and five years, with the most common being three to four years. You’d therefore make 36 to 48 payments towards the total cost of your car, excluding the initial deposit.
You can negotiate the length of your contract. Usually, longer contracts charge more interest per month but this can vary depending on other factors – such as your credit score and the size of your deposit – so check your contract and ask the finance company for more details in each instance. Once you’ve paid off the full amount, you legally become the car’s owner.

What happens at the end of a HP agreement?

At the conclusion of the Hire Purchase agreement, you’ll officially become the outright owner of the car, with no further payments required.
You may have one final ‘Option to Purchase’ fee to pay before you officially own the car. This is a nominal fee, so could be anything from £1 to £200. Always check your contract and make sure you understand the terms and conditions before you sign up. If you no longer wish to keep the car, you have the option to sell it privately or part-exchange it for another – but only after you become the owner and have no outstanding finance left on it.

Terminating a Hire Purchase car contract early

In most instances you’ll have to pay off at least 50% of the amount you owe before you can terminate your contract. This will include interest owed.
If you haven’t yet paid off 50%, you’ll have to make up the difference. For example, if you’ve only paid 40% off, you’ll need to pay the remaining 10%. If you cannot afford to do this in one lump sum, you may be able to pay this outstanding amount in instalments – check with your finance company if this is the case. If your Hire Purchase contract is with a dealership, they may offer to pay your outstanding finance if you choose to trade it in for a new model. Consider ending your car finance deal early if you're facing challenges with payments, financial difficulties, a desire to reduce costs, or no longer needing the vehicle. Before deciding, understand the conditions and costs associated with early termination. Different finance agreements (PCP, HP, PCH) have specific considerations. HP allows early return if you've paid half the car's cost, with capped charges for early repayment. Using savings to repay the agreement early is an option if the interest on your finance is higher than what you're earning. Keep in mind the impact on your credit file, especially if using voluntary termination frequently. Communication with the finance provider is crucial, and maintaining regular payments ensures more favorable terms during early termination. Always assess your financial situation before deciding to end your car finance deal prematurely.

Can Hire Purchase contracts be transferred?

In most instances, you cannot transfer a Hire Purchase contract.
Car finance agreements are written with the applicant in mind – they take their finances, credit rating and other factors into consideration and so they would not be applicable to someone else. If someone wants to buy your car, you’d have to settle your HP contract first.

What are the other types of finance and how they compare?

Before you commit to Hire Purchase, it’s worth exploring your options and make sure you’re confident in your decision. In addition to bank loans and saving up to buy a car in cash, there are other car finance options available:
Personal Contract Purchase (PCP) – usually cheaper every month as it only covers the car’s depreciation (but remember you’ll have a balloon payment at the end), with the option to trade-in the car at the end. • Car leasing – if you aren’t fussed about owning the car, leasing is a great way to drive a new car every couple of years. Always check the terms and conditions of a contract, and make sure you can make the monthly payments before you commit.

Should I get a car on HP?

Who is HP right for?

Hire Purchase is an option for individuals seeking a clear path to owning a car without a having to pay everything upfront. But there are a number of pros and cons.

What are the drawbacks of Hire Purchase?

• Monthly payments are generally higher than with other forms of finance, like PCP
• If you leave the contract early, either by paying it off or just walking away, you’ll often have to pay a penalty charge, even if you’re up to date with your payments • If you don’t keep up with payments, the car may be repossessed, and you’ll lose the money you’ve already paid • The car can’t be sold before the final payment, unless you contact the finance company and agree a termination value • You can’t sell or modify the car without permission, until you are the legal owner and all payments have been made

What are the benefits of Hire Purchase?

• Equal monthly payments and fixed interest rates can be easier to budget for
• The deposit you put down is relatively low, normally around 10% • Flexible contract lengths and repayment terms mean you can find a contract length and price that suits you • You don’t need to make a large final payment, like with PCP • Buying through HP gives you some extra protection if there’s a problem with the car, as the finance company or retailer are liable – but always check your contract to confirm • You’re unlikely to have mileage restrictions, like you would with PCP

How do I get HP finance?

Am I eligible for HP finance?

Most retailers and dealerships will offer Hire Purchase financing, and it's also available through banks, credit unions, and online lenders.
Eligibility depends on factors like your credit score, income and existing debts, as well as the amount you’re hoping to borrow for the HP agreement.

Do I need a credit check for HP finance?

Yes, when you apply for an HP contract, the lender will perform a credit check. Try to avoid too many applications and checks in a short space of time, as they will appear on your credit file and this can affect your credit rating.
Learn more about credit ratings, and what to do if you have a bad credit rating.

Paperwork you’ll need to fill in for a HP contract

For a standard HP contract, you will need to provide proof of identity, address, and income. The finance provider will guide you through the necessary paperwork.
• Personal details including your full name, date of birth, marital and residential status and full address history for the last three years. • Employment details including the names and addresses of all employers in the last three years, plus job title and proof of salary. If you’re self-employed, you’ll need to provide proof of income – such as accounts. • Bank details including the branch address, sort code and your account number from the last three years. • ID, which could be your driver’s licence, proof of address or proof of income Try to provide as much as you can. Try to arrange your paperwork in advance so that your application goes smoothly. Learn more about applying for car finance.

Running a car bought on HP

You’ll have a few responsibilities when running a car being financed through Hire Purchase.
• You're responsible for ensuring the car is properly insured and taxed. • You're accountable for the vehicle's upkeep, including routine maintenance and any necessary repairs. • If the car is over three years old, it's your responsibility to ensure it passes its annual MOT test. • Some HP contracts may specify that servicing be conducted at authorized servicing centres, especially if your contract is with the manufacturer.

What happens if I miss a payment?

If you’re worried about missing payments, contact the finance provider immediately. They’ll be able to talk you through your options.
If you miss payments, you could face additional fees, a negative impact on your credit score and potentially repossession of the vehicle. Always seek guidance where you can. Money Helper and a href="" rel="nofollow" target="_blank">Citizen’s Advice can also provide free, impartial advice.

Can I terminate my contract early?

Ending the agreement early may incur fees, so consult your provider for details. You normally have the right to cancel an HP plan within 14 days of signing the agreement, though charges may apply after this period. As ever, check your contract and ask the provider any questions to help ensure you know what you’re signing

What is Conditional Sale?

Some dealers offer a slightly different arrangement, called Conditional Sale.
The main difference between Hire Purchase and Conditional Sale is that the customer must buy the car at the end of a Conditional Sale agreement. There is no ‘Option to Purchase’ fee payable, like there is with HP, and you will automatically become the vehicle owner once you’ve made all your repayments to the lender.

Hire Purchase car deals

Searching online is a great way to find the latest Hire Purchase car deals, and compare them to find one that suits your budget.
When you’re comparing Hire Purchase deals, consider the total cost of purchasing a car this way. Figures to keep in mind include: • The APR you’ll be paying, which includes the interest and other fees payable • The total cost of credit • The total amount you’ll repay • Look out for optional fees lenders may charge. Try to add up the total cost – low monthly repayments can look good, but they may come with higher interest rates and thus cost you more over the duration of the contract than higher monthly payments with low interest rates would. On the flip side, you also want a monthly cost that is manageable for you. As with anything, it pays to shop around and speak to different dealers, and you may find you can negotiate on price.