Hire Purchase (HP)
Despite the word ‘hire’, hire purchase is about ownership. If you use hire purchase to finance the purchase of a car it is actually committing to buying the car outright via a secured loan that is paid back monthly across the agrred period (usually 3 - 5 years). Monthly payments are therefore much higher than when ‘leasing’ or using PCP.
Advantages of Hire Purchase
Hire purchase has several advantages over a personal loan:
- Hire purchase is cheaper than a (‘unsecured’) personal loan because the ownership of the car is retained by the finance company (ie; it is secured) and if you don’t make your monthly payments then they will simply take the vehicle back.
- Hire purchase is relatively quick as it is offered directly by most dealers and manufacturers and is agreed to more easily than personal loans
- Deposits are lower than with personal loans
And compared to personal contract purchase (PCP), if the final ‘balloon payment’ is paid to acquire the car, then a hire purchase agreement would likely have been cheaper overall even considering notably higher monthly payments
And compared to personal contract hire, if you intend to own and retain the same car for more than 4 or 5 years, than hire purchase is cheaper over the long term than leasing because there are no further payments once you own it completely
Disadvantages of Hire Purchase
What are the disadvantages of hire purchase?
Compared with personal contract hire or personal contract purchase:
Often the finance company will expect all of the VAT for the whole value of the car to be paid with the first installment, whereas with leasing the upfront payment is only the equivalent of three months payments;
- the monthly payment required is always much higher;
- you are paying interest on the full value of the car, even if you don’t intend to retain it for longer than 2-4 years;
- there are often hidden fees and individual dealers are not incentivised to offer you the best deal immediately so you would need to shop widely before being sure you have a good deal;
- the termination fee is significant if your circumstances change and you don’t want the car anymore
And compared with a personal loan, you are not the owner of the car from day one so you can not modify or export it
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