Hire purchase is a way of buying a car on finance, where the loan is secured against the car. You’ll need to pay a deposit of around 10%, then make fixed monthly payments over an agreed time period.
This means you don’t own it until the last payment has been made. So if you miss payments, you could lose the car.
Hire purchase agreements are usually arranged by the car dealer. This means they’re convenient to arrange and can be very competitive for new cars, but less so for used ones.
Rates are best for new cars, so check what you’ll be paying if you’re buying a used car.
When you’ve paid half the cost of the car, you might be able to return it and not have to make any more payments – check your contract to see if this applies to you. The car will need to be in good condition too, or you might be charged for repair costs.
When you’ve paid a third of the total amount you owe, your lender can’t repossess your vehicle without a court order.
Pros and cons
Pros
- Low deposit (usually 10%).
- Flexible repayment terms (from 12 to 60 months).
- Competitive fixed interest rates.
Cons
- You don’t own the car until the final payment.
- Tends to be more expensive for short-term agreements.
- How hire purchase works
Usually, you’ll first need to put down a deposit on the car you want to buy. For most hire purchase agreements this will be 10% or more of the vehicle’s value.
The rest of the value of the car will then be paid off in instalments over a period of 12 to 60 months (one to five years).
Hire purchase is arranged by the car dealer, but brokers also offer this service. The rates are often very competitive for new cars, but less so for used cars. For second-hand cars the annual percentage rate can vary from 4%–8%. The lower the number the better.
The loan is secured against the car, which is why you can’t own it until you’ve made your last payment, including paying the Option to Purchase fee.
Make sure you understand the terms and conditions of your loan before signing the contract. For example, once all repayments have been made you pay a final fee, known as the ‘Option to Purchase’ – once you’ve paid this you’ll own the car. This is typically £100–£200, but it does vary so ask how much it will be.
Examples of the cost of buying a car through hire purchase
For a car priced at £25,000:
deposit: £1,000
APR: 6.9%
term (length of the contract: 60 months (5 years)
monthly payments: £471.74
option to purchase fee (the fee so you own the car at the end of the term): £200
Total amount payable: £29,504.40