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HP explained - Hire Purchase

Published 29 April 2016

Choosing to fund a car through hire purchase can have a number of benefits. What's more, if you plan to keep your vehicle for several years, it usually woks out more cost effective than a PCP (personal contract purchase).

Although the phrase ‘hire purchase’ sounds like the customer may be renting the vehicle, it is actually a commitment to buy it. 

Unlike a PCP, where there is a larger final payment at the end of the agreed term, the hire purchase agreement might well go on for a little longer, and monthly payments are higher. This is because the customer is paying off the full value of the vehicle in equal amounts each month.

If someone were to buy a car priced at £17,000, they might put down a deposit of £4000, then pay off the remaining £13,000 over the course of five years in monthly payments. In the simplest of terms, each monthly payment would be around £217 (£217 x 60 months), excluding any interest on the finance), and the customer would finally own the vehicle after making the final payment.

The monthly payment will always be higher than with a PCP because there is no ‘balloon payment’ at the end of the agreement...

If someone were to choose a car priced at £12,000 and put down a £3000 deposit, then pay off the remainder over four years (48 months), the monthly payments would be around £188 (£188 x 48 months).

Interest payments on the finance will mean monthly payments work out a little higher than in the examples, but all of this will be made clear at the beginning of the hire purchase agreement so customers know how much their monthly commitment is.

Hire purchase tends to be cheaper than borrowing money in an unsecured loan. This is because the vehicle becomes the security. If the customer can no longer keep up the monthly repayments, the vehicle is taken back. They can be arranged quickly and easily by most new car dealers, and deposits tend to be affordable.

Compared with other funding methods, hire purchase agreements often expect all of the VAT to be paid up front. The monthly payment will always be higher than with a PCP because there is no ‘balloon payment’ at the end of the agreement.

Termination fees will most likely apply if you decide you no longer want the car, and you will need to shop around to ensure you get the most competitive deal. Only after the final payment does the customer own the car, so no modifications can be made and the car may not be sold or exported.

Comments

corinthian    on 22 September 2016

£4000 deposit on £17000 leaves one owing £15000 does it ? I wonder how much value may be put on the rest of your ' advice ' !

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