What is a Hire Purchase Agreement?

In this guide:

• What is Hire Purchase (HP)?
• How does HP work?
• Advantages of Hire Purchase
• Disadvantages of Hire Purchase
• What is the difference between Hire Purchase and leasing?
• Is HP right for you?
• Find flexible finance options

What is Hire Purchase?

Hire Purchase (HP) is a type of finance agreement used to buy a new or used vehicle, without having to pay the full purchase price up front. Instead, buying a vehicle through HP allows you to spread the cost with a fixed rate of interest over a set term, usually between 2 and 5 years. 

It’s essentially a loan, where you put down an initial deposit and repay the rest of the borrowed money on a monthly basis. Hire Purchase finance agreements are great for those who want to own the vehicle at the end of the repayment period, as you will take ownership of the vehicle from the funder once your monthly instalments are complete.

How does HP work?

Once you’ve chosen a vehicle you’d like to buy, get in touch with a dealership or a broker to discuss your needs and set up a HP plan that works for you.

Spanning from start to finish, this is how you can expect Hire Purchase to work:

1. Pay a deposit - decide how much money you want to pay upfront. The more you put down, the lower your monthly payments will be. Some lenders will require you to cover a minimum percentage of the vehicle’s value, but there is typically some flexibility.
2. Make monthly payments - over your contract period, you’ll make monthly instalments to pay off the loan. This will include interest and will be fixed each month, so you know what to expect.
3. Take ownership at the end - once the borrowed amount and interest have been repaid, you can become the official owner of the vehicle. Sometimes there’s an additional payment to make at the end of the term, called an “Option to Purchase” fee - but this isn’t as costly as balloon payments you find with a Personal Contract Purchase (PCP) or Business Contract Purchase agreements.

For example, let's say you want to get a brand new Ford Puma Gen-E electric hatchback, but don’t fancy paying the full purchase price of £29,995, and decide HP would work better for your budget. Your HP agreement might work something like this:

• Deposit: £5,000
• Term length: 5 years
• Fixed interest rate: 5.9% APR
• Total amount to pay over your contract: £33,923.60
• Fixed monthly payments, including interest: £565

Applying for finance

As Hire Purchase contracts involve loaning you money for the purchase, lenders will need to make sure you’re able to repay them. They’ll look at your credit history to check how you’ve historically managed any loans or debts.

Before you apply for Hire Purchase, it’s a good idea to have the following on hand or up-to-date:

• A good credit score.
• Personal information such as full name, birthday, and address history for the last few years.
• Details about your income and employment history.
• Proof of ID, such as a valid passport or driving licence.

Advantages of Hire Purchase

Aside from being able to afford to get a better car than you could afford to buy outright, there are several other benefits of Hire Purchase agreements.

• Fixed monthly payments that are easy to budget.
• Obtain ownership after making all of the repayments.
• Flexibility to choose the term of the agreement (typically 2-5 years).
• Road tax at the current rate is included for the initial 12 months.
• Unlikely to have any mileage restrictions.
• Optional service, maintenance and repair plans for easy upkeep.
• When businesses enter HP agreements, 100% of the VAT can be reclaimed upfront. While depreciation isn’t tax-deductable, businesses can also claim capital allowances, as determined by HMRC, to help offset losses against taxable profits.

Disadvantages of Hire Purchase

There are some potential downsides to Hire Purchase finance to be aware of, depending on your circumstances:

• Non-payment may lead to contract termination, vehicle repossession, and negative impacts on your credit score.
• Monthly payments might be higher than other finance options, as you’ll be repaying the full value plus interest.
• The longer your agreement period, the more interest you’ll pay.
• The vehicle may be worth less than you paid for it at the end of your agreement, especially if it’s new, as vehicles depreciate the most in the first few years of their lives.

Other important reminders

• Comprehensive insurance is a must.
• Service and maintain the vehicle according to the manufacturer’s recommendations and keep it roadworthy. 
• Use only genuine manufacturer parts as per your agreement and vehicle warranty. 
• Only commit to Hire Purchase if you’re comfortable with the financial terms, and make sure that you fully understand the agreement before entering into it.

What is the difference between Hire Purchase and leasing?

The main difference between a Hire Purchase agreement and a lease agreement is who owns the vehicle.

Unlike HP, with a lease agreement, the lender retains ownership, and you never become the owner of the vehicle. This means you don’t take on all of the responsibilities involved with ownership, such as reselling, depreciation, and even maintenance, as some lenders offer maintenance and repair plans.

Is HP right for you?

Yes, if you definitely want to own a car or van but haven’t got the immediate funds to do so, Hire Purchase finance offers the opportunity to offset expensive costs. 

Hire Purchase might not be a good fit if: 

• You don’t want the risk of the depreciating value.
• You want to use the vehicle abroad extensively, as there may be restrictions.
• Putting down an initial payment, usually between 10% and 50% of the cost, would be difficult for you.
• You’re a business with specific uses, like taxis and driving schools.
• You want to finance a car or van and haven’t got access to funds to cover the total VAT on the purchase price, as this needs to be paid up front, though it can be claimed back later.
• You’d prefer to spread the cost through lower monthly payments, which are available through leasing offers.

Find flexible finance options

Hire Purchase is a viable option for many people and businesses if you want to own a vehicle but don’t have the funds available to buy it outright, but leasing a car offers many of the same benefits without requiring ownership.

Explore the latest lease deals on brand new cars, vans, and EVs, and discover flexible leasing options with Jurni.