Everything you need to know about hire purchase

What is hire purchase finance?

Hire purchase (HP) is a type of car finance that can be used to cover the costs of new or used vehicles. If you know you’re not going to be able to foot the bill upfront for a new car, this approach can help you drive away with the wheels you want, without having to fork over a massive lump sum.

HP allows you to pay for a car in instalments over a set period of time. You’ll typically pay a deposit to release the funds for leasing the car over the agreed term, then pay the lender back over time. At the end, after paying a one-off final fee, you will own the car outright. It’s important to remember: you do not own the car until the final payment is made. If you cannot keep up with the payments the finance company could reclaim the vehicle.

Here we will get into the details of how HP works, how you apply, whether it’s the best option for you and what the downsides are.

How does hire purchase car finance work?

• Find the car you want
• Confirm how much you will need to borrow
• Pay an initial deposit
• Pay off the rest of the value of the car in instalments, plus interest
• There will likely be a one-off final fee before you own the car outright

How you apply for hire purchase

• Once you have picked your car, you will know how much you need to borrow
• You can normally get HP finance through your car dealership
  - Tip: compare options with online brokers before going to the dealership so you know you’re getting a good deal
• You can search and compare hire purchase options with Experian
• You will agree on a deposit amount with the lender – the more you pay the cheaper the monthly instalments
• Agree on contract length and monthly cost
• Make sure you have gone over the contract in detail
• Once you’re happy with the contract and have signed, you can drive the car away

What you need for hire purchase finance

You’ll need to present certain information, documents and proof of ID, so your application can be assessed.

• Personal details: Full name, date of birth, address history
• Employment details and history
• Bank details of account you will pay from
• Identification documents: Driver’s licence, proof of address and proof of income

How to cut monthly payments

To keep your monthly payments low, there are a number of things to consider:

• The bigger your deposit, the less you’re likely to have to pay each month. Some dealerships will even offer 0% APR if your deposit is big enough
• Spreading the cost over a longer period of time. This will give you smaller monthly payments. But remember, you’ll end up paying more in interest
• Having a good credit score. The deal you get will be based partly on your credit history
• You can check your Experian Credit Score for free

Benefits of hire purchase

• HP allows you to get a car you may not have been able to buy outright
• You will own the car once all payments are made
• Payments are at a set amount over an agreed upon timespan
• Interest rates are normally fixed. This means you know exactly how much it will cost, allowing you to budget appropriately
• You don’t have to be conscious of mileage limits, as you do with PCP

Downsides of hire purchase

• Monthly payments can be higher than other financing options (but you’ll likely pay less in interest)
• Your loan is secured against the car. If you miss payments the lender could repossess the car
• You do not actually own the car until you’ve paid off all the instalments
• Until you have paid off a third of the amount owed to the lender, they can repossess the car without a court order
• If you decide to pay off over a longer period, you’ll end up forking out more in interest payments
• Missed payments could damage your credit score

Is it the right option for you?

There are, of course, other ways to finance a new car. If you don’t actually want to own the car outright, you might consider PCP financing. This, in effect, allows you to hire a vehicle over a set amount of time, then when you’re ready for a new ride, you can switch your deal to a different model. Or, if you’re looking to pay less, a personal loan will usually offer cheaper monthly payments. However, these tend to be unsecured loans, unlike PCP or hire purchase, so are harder to be approved for.

For more detail, read our guide on the different types of car finance. It’s a good idea to check your credit score and report before financing a new car. You’re more likely to get offered more favourable rates the better your score is, so it’s worth getting your credit score in shape before making any applications to help secure the best deals. Read our guide to get tips on how to improve your score. And, once you’ve done your homework and you’re ready, you can search and apply for the right car finance for you, with our help.

Just remember, we’re a credit broker, not a lender†. That means we don’t provide credit, but we can help you find offers from a range of companies.