Hire Purchase Funding Explained
Not all of us are in the position to be cash buyers, especially when it comes to some of the hottest and most innovative new models on the market. It’s why car finance is so popular.
One way of financing you’ll see mentioned is Hire Purchase. But what is it, and how does it work?
How it works
Hire purchase is another way saying ‘loaned until it’s paid for’. You agree a price for the car and a period over which to pay it off.
You then put down as much as you can up front as a deposit, and the difference (plus any interest) is spread out over monthly instalments. Once you make the last payment, legal ownership transfers into your name and it’s yours to keep, sell, part-ex, or whatever you like.
There’s no scary balloon payment at the end, although the very final payment usually includes an ‘option to purchase’ fee (to account for the paperwork processing involved with transferring the ownership).
There are no mileage limits, so if you’re a high-mileage driver this can work out cheaper than a PCP deal. And the monthly payments are fixed for the duration of the agreement, so you’ll know exactly what you’re going to be paying each month.
What should I look for?
When shopping for a Hire Purchase deal, you should look at and compare:
- The purchase price of the car, including any discounts you can negotiate
- The APR % being offered
- The ‘option to purchase’ fee
- Any contributions towards your deposit
- Any optional extras the dealer is throwing in
What if you want to sell the car?
As you don’t legally own the car until the final payment is made, you can’t sell the car without getting the finance provider’s permission. If you’re part-exchanging it against a new car, your dealer can help you do this.
Can you pay off a Hire Purchase agreement early?
Yes. If you come into some money, or decide to re-finance through other means, you can clear the balance of your Hire Purchase agreement, and any interest that would have been payable on the outstanding balance is waived.
What happens if you miss a payment?
Just like a mortgage, the finance company can legally repossess the car if you fall behind on your payments. So if you’re struggling to meet your repayments for any reason, contact the finance provider ASAP.
What are the alternatives?
You could instead take out a personal loan, which technically makes you a cash buyer when you’re sat in the dealership – and that can sometimes secure you a better price on the car. You’ll also be the legal owner from day one, too, and could potentially borrow the total value of the car - meaning you needn’t find your own deposit. Depending on how much you’re borrowing, though, you may end up paying a higher APR %, so look at the total amount payable to be sure.
And of course, there’s the option of a PCP deal. This is a fixed-term, limited-mileage agreement, with a balloon payment deferred to the end based on the car’s predicted future value. All of this can contribute towards reducing your monthly payments, but you won’t automatically own the car after the agreement finishes.