What is Hire Purchase (HP) Finance?

Hire Purchase (HP) finance makes paying for a car a lot more manageable, because rather than buying the vehicle upfront for a large sum, you will be able to split the cost into much smaller monthly instalments. Effectively, you will be hiring the car until your contract is over and you have made all of the repayments. After this, the car is yours to keep or sell on.

How Does HP Work?

When you find a car that you want to buy, you will be asked to put down a deposit, which is usually around ten per cent of the vehicle’s full price. You will then need to pay off the remaining value of the car in monthly instalments over a period of time agreed by the finance provider.

A HP contract term can range from one to five years, but be aware that the longer your contract, the more interest you will pay. Typically, APR interest rates are between four and eight per cent for hire purchase arrangements and this rate will be applied to each monthly payment.

Here’s an example of how HP works. If you choose to buy a vehicle worth £15,000 on finance, you may pay an initial deposit of £1,500 (ten percent of the vehicle’s price) which would mean that you would need to borrow the remaining £13,500 from your finance lender.

If the provider agrees to let you pay this back over the course of three years, with a seven per cent APR deal, your monthly repayments would be £451.51. When your contract ends, you will have paid back £14,958.54, and will then be able to take ownership of the car, paying a transfer fee of £200. In total, you will have paid £16,658.54 for your vehicle.

What Happens if You Miss a Repayment?

If you fail to make one of your monthly payments, you will be contacted by the finance lender, who will want to know if this was just a simple mistake, and as long as you rectify the issue by making the payment straight away, you will not face any penalty.

If you continue to miss payments regularly, your finance provider will mark you ‘in default’, and could repossess the car. It is important that you get in touch with the lender as soon as possible if you are struggling to make your payments, as they will be more likely to sympathise with your situation, and they may be able to help.

Can You Cancel a HP Agreement?

If you have paid back over half of the amount you borrowed, you will be able to return the car to the finance company. This is known as voluntary termination. If you have not yet repaid half of amount due, you will need to make up the difference before you can terminate the contract.

Make sure that the vehicle is in good condition if you wish to return it, otherwise, you will be charged for any repair work that is needed.