Hire Purchase explained
A hire purchase agreement is one of the most popular ways to buy a car, motorcycle or light commercial vehicle. This guide to hire purchase explains the key features and benefits of this type of finance agreement.
What is Hire Purchase?
A hire purchase agreement, also referred to as HP, is a hire agreement which gives you an option to purchase at the end of the agreement. HP is normally a fixed cost (where the APR is set before the contract begins), fixed period loan (typically, 1-5 years) of money to purchase goods, which is secured against the car being bought.
You are the registered keeper of the car and are responsible for insuring and maintaining it, but the finance company providing the HP agreement remains the legal owner (‘has title’) of the car until the amount you have borrowed has been fully repaid and you have decided to pay the ‘Option to Purchase’ fee. However, a Hire Purchase agreement can be repaid in full at any time during the term of the agreement, by requesting a settlement figure from the lender.
How does Hire Purchase work?
The customer chooses a vehicle from a new or used car, motorcycle or LCV supplier and completes a finance application to borrow money to ‘buy’ the car.
The finance company considers your application, and if accepted, then pays the dealer for the car. It is the finance company which buys the car (and becomes the legal owner) and the customer who uses it (known as the registered keeper on the car log book )
The finance company allows the customer to use the car for an agreed period of time, subject to the receipt of agreed repayments. When all the repayments have been made the customer will be given the option to purchase the car and gain outright ownership. The customer can do this by paying the ‘Option to Purchase’ fee, which is usually a nominal fee of around £50-£100 to cover the finance company’s administrative costs of transferring ownership (title) of the car to the customer.
What happens at the end of a Hire Purchase contract?
There are several ways to conclude a Hire Purchase Agreement:
Early Settlement –You can settle a Hire Purchase agreement at any point in the agreement by paying the outstanding balance and the Option to Purchase fee to the lender.
End of Agreement / Contract - At the natural end of a Hire Purchase contract, once all the contracted payments have been made, you can pay the Option to Purchase fee and take legal title to the car. Alternatively, you can choose not to pay this fee and simply return the car to the finance company.
Fees / Charges -Finance companies will disclose all fees and charges in the terms and conditions of the Hire Purchase agreement.
Fixed monthly payments and interest rate, the option to settle at any time, and ownership at the end of the term. Very flexible terms, and lower deposit requirements than Lease Purchase and PCP.
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