Hire Purchase and Loan Cars
What is Hire Purchase?
Car Hire Purchase (HP) is extremely popular in the UK and accounts for 26% of all car finance deals. HP is an opportunity to buy a new vehicle without paying the full price upfront. With HP contracts you’ll typically be expected to pay a deposit before a monthly direct debit is set-up. Once the contract has expired, you then have the option of paying the remaining total to own the car.
Hire Purchase contracts usually require a deposit, which Car Buyer suggest is around 10%. Monthly instalments are then made for anywhere between one and five years. Whatever value of the vehicle is outstanding, you can then pay to own the car yourself. Essentially, Hire Purchase is the same as loaning the car until the final payment is completed.
Most recognised car dealers will offer HP finance and rates can be very competitive. As such, it’s well worth searching for the best deal possible to get the most from your money. Also, ensure the full terms and conditions are read and understood before signing.
To be eligible for HP, you will need a good credit rating. As HP is a type of loan, the dealer will likely use a well-known creditor to ensure you’re financially sound.
Benefits of Hire Purchase:
With HP there are a number of benefits to consider. These include:
- Flexible repayments: Repayments are usually between one and five years, giving you greater flexibility to set your term. Paying over a longer period will result in cheaper monthly instalments, but a greater overall cost.
- Low deposit: Depending on the vehicle you take HP on, you can end up paying quite a low initial deposit. Most HP contracts work off a 10% deposit, so ensure you have the finances available for this.
- Fixed interest rates: HP contracts have fixed interest rates, so when you sign-up you’ll know exactly how much to pay each month over the agreed term.
- Avoid a final settlement: HP gives you the option of purchasing the car at the end of the contract. This isn’t obligatory though and you can instead return the vehicle at no further expense.
Drawbacks of Hire Purchase
As with anything, there are some drawbacks to Hire Purchase it’s important to consider:
- You don’t own the car: As The Telegraph explains: the vehicle belongs to the dealer until your final balloon payment. If you come into financial difficulty at some point during the contract, the finance company have the right to take the vehicle away.
- Payments are linked to the deposit: If you pay a smaller deposit, you’ll be subject to paying larger monthly instalments on the vehicle.
- Car repossession: Until you have made monthly payments to total a third of the car’s value, the lender can repossess the vehicle without a court order.
What is the Difference Between HP and Leasing?
Hire Purchase and leasing contracts are both similar in many aspects. They allow individuals and businesses the opportunity to drive a new car without having to pay large upfront costs.
However, whilst they can be similar, there are also key differences in how they operate. Knowing these differences and comparing the two can help you to save a small fortune.
Car leasing enables you to pay lower monthly payments as opposed to taking out a HP contract. This is because you’ll be paying the difference between the retail price and the price after depreciation. Leasing is a much better option than buying and Go Compare explain how a Ford Mondeo is worth just 36% of its original value after three years. For this reason, in your leasing contract will be an agreed total mileage you are allowed to complete.
Car leasing example
The retail value of a new vehicle is £21,000. If you take a three-year contract, the value of the vehicle after this period may stand at £15,000. Therefore, you must pay the depreciation value of £6,000.
£6,000 / 36 months = £166.66 per month.
Hire Purchase finance
With HP finance you’ll be expected to pay the vehicle’s full value over a set period of time. Of course, there is the option of extending the length of your contract, but you will pay more on interest rates by doing so. Adversely, a shorter contract will see you making larger payments over the duration of the finance agreement.
Hire Purchase example
The retail value of a new vehicle is £21,000. If you take a three-year contract, the calculation can be seen below:
£21,000 / 36 months = £583.33 per month.
Even over a five-year contract you’ll be paying more than the lease:
£21,000 / 60 months = £350 per month.
What is a Car Loan?
There is yet another option to pay for your next vehicle. Taking a personal loan from your bank or building society to fund the purchase of a car can be a cheap way to borrow the money, but it’s important to know what you’re doing.
At this point, it’s worth noting that you should avoid loans that are secured against your home. If you suffer financial difficulties, the last thing you’ll need is your home being repossessed.
Next, you should be on the lookout for the best loans by interest rate. Compare the APR rates and locate a lender providing the cheapest option. Money Supermarket says interest rates tend to start at around 5% or 6%. Before signing the contract you should make sure the repayment rates are manageable to prevent you falling behind.
A personal loan will have a cooling off period. This tends to be 30 days and allows you to repay the money with no interest rate attached.
Benefits of taking a personal loan
There are a number of benefits to taking out a personal loan for your next car.
- The loan can be arranged online, on the phone or in your local branch
- You can choose the amount of money borrowed
- There’s an opportunity to find cheap interest rates and deals
- You will choose the repayment period, usually between 12 and 48 months. Remember, the longer the contract, the more interest you’ll pay on the loan
- Unlike with HP, you will own the vehicle whilst paying off the loan. This has a huge advantage as you can sell the vehicle if your financial status worsens.
Drawbacks of taking a personal loan
As well as the benefits outlined above, there is a range of negatives to choosing a personal loan to finance your car.
- There could be a period of time when you’re waiting for funds to become available
- Personal loans can be more expensive than other options. Some dealers may offer 0% interest to move cars on.
- Personal loans can have a negative effect on your credit rating. This can have an effect on your future investments, such as when taking out a mortgage.