How to get the best hire purchase deal

Hire purchase lets you buy a car without paying its full value in one go. Instead, you put down a deposit and then pay off the rest of the cost in monthly instalments, plus interest.

The company providing your finance will own the car until the end of the contract. Once you’ve made the final payment — called the “option to purchase” fee — the car is 100% yours.

You have use of the car while you’re paying for it, with the car itself acting as security for the loan. But, if you can’t keep up with the payments, the finance company can repossess the car and it may impact your credit score.

HP can be used to finance both new and used cars. The rates tend to be more competitive for new cars.

First, take a look at the finance options available to you and how much they might cost. Once you’ve done this you’ll need to find the car that suits both your budget and your needs.

You’ll probably be offered car finance from the dealer but you’ll often find better deals online. Find your best deal with TotallyMoney here..

If you're looking for quotes online, check whether they'll do a hard or soft credit search. A hard search can affect your credit file, whereas a soft search won’t. You can check your eligibility before applying for HP and know which deals you are likely to be accepted for.

You’ll normally need to pay an initial deposit. This can be anything from zero up to about 10% of the car’s value. 0% deposit deals might sound great but your monthly payments will be higher.

The rest of the car’s value is a loan, with interest, that you’ll pay off each month.

HP terms vary between one and five years. The shorter the term, the higher your monthly payments will be, but you’ll pay less interest overall. Longer terms reduce your payments but the total interest bill will be higher.

At the end of the contract you’ll pay a final one-off fee and then you own the car outright. The fee is normally £200 at most and you only own the car once you’ve paid this final fee.

As with any finance product, it’s really important to read the agreement before signing. If you have any questions, get the dealer or finance broker to answer them before committing.

Although you’ll sign the contract to purchase the car from the seller, the seller will invoice the finance company for the vehicle.

The finance company buys the car, becomes the owner, and authorises you as the keeper of the car.

You then repay the finance company over the term. You won’t own the car until the end of the contract. Technically, you hire it from the finance company while you’re paying off the loan.

At the end of the contract you’ll have to pay a final fee (normally about £200) and then the car is 100% yours.

Up until the final payment is made, the finance company can repossess the car if you miss payments.

HP terms are normally between one and five years.

A longer term will mean lower monthly payments. But you’ll end up paying more in interest overall.

A shorter term will mean higher monthly payments —but you’ll pay less interest overall.

When choosing your car finance option make sure that you can afford the monthly repayments for the full duration of the agreement.

Once all repayments have been made at the end of the term, you pay a final fee to own the car outright.

This fee can be known as:

The fee should be stated in the HP agreement you sign at the start. It’s normally a maximum of £200.

Once you’ve paid this fee, you 100% own the car. You’ll be free to keep it, sell it or modify it.

Your HP finance provider legally owns the car until the loan is repaid, so it is legally responsible for any problems with the car.

If the car is faulty you’ll be covered by the Supply of Goods (Implied Terms) Act. This states that goods must meet their description and be of a satisfactory quality and fit for purpose.

If you can’t resolve the issue with the HP provider, you can take your complaint to the Financial Ombudsman Service.

HP might be for you if you:

There are several other ways to buy a car.

Paying cash for a new car is the most straightforward option — and the cheapest, as you’re not paying interest on a loan or finance agreement.

A personal contract purchase (PCP) is also a type of loan. But, you don’t borrow the full price of the car. Instead, you borrow the difference between the car’s value and the expected value at the end of the agreement. If you want to own the car at the end of the agreement, you’ll need to make a “balloon payment.”

The balloon payment can be hefty — much bigger than the transfer fee at the end of a HP deal.

Personal contract hire (PCH), or car leasing, is similar to renting a car. There’s no option to own the car at the end of the hire period. It’s normally used by businesses, rather than individuals.

A credit card can be a handy way to spread the cost of buying a car. If you use a 0% purchase card, you can spread the cost without paying any interest.

You can also take out a personal loan, a specialised car finance loan, or a guarantor loan to buy a car.

If you need to borrow money to buy a car, check your eligibility first. TotallyMoney’s eligibility check will show you how likely you are to be accepted before applying. If you apply for a car finance deal you’re eligible for, you can avoid rejection and it won’t damage your credit score.

A conditional sale arrangement is like HP, but you commit to buying the car from the start.

There isn’t a final payment or option to purchase fee at the end. Instead, you automatically become the car’s legal owner once you’ve made all your monthly payments.

Typical representative APRs for HP agreements tend to be between 4% and 8%. The exact rate you pay will vary based on individual circumstances and the car you’re looking to purchase.

Some dealers might offer 0% finance – but these deals tend to require a hefty deposit.

Putting down a bigger deposit will reduce the amount you need to borrow and lower your monthly payments.

The more you borrow and the longer the term, the more interest you will pay.

The better your credit score, the better the deals you are likely to be offered. You should check your credit report before you apply for finance. If there are any errors you can raise a dispute through TotallyMoney. This will make sure lenders have an accurate view of your credit history, so they can make an informed decision about lending to you.

APR stands for annual percentage rate. It is the official rate used to help you understand the cost of borrowing and compare different credit offers.

The representative APR takes into account the interest rate and additional charges of a credit agreement. All lenders must tell you the representative APR and the actual rate that you’ll be paying before you sign a credit agreement.

There are two ways to make your repayments are low as possible:

But these strategies come with downsides. You’ll need to have a lump sum of cash to put down a bigger deposit, and a longer term will result in a bigger interest bill overall.

Here’s an example which shows the difference a bigger deposit makes.

If you were buying a car worth £8,000 and put down a £500 deposit, you’d need to borrow £7,500. If you got a three-year HP deal at 5% you’d pay £224.78 a month. Over three years your payments would come to a total of £8,092. The credit would have cost £592, and you’d have paid £8,592 in total for your car.

If you bought the same car for the same price and put down a deposit of £2,000, you’d need to borrow £6,000. A three-year HP deal at 5% would mean paying £179.83 a month. Over three years your payments would come to a total of £6,473.88. The credit would have cost £473.88, and you’d have paid £8,473.88 in total for your car.

Here’s an example which shows the difference a longer term makes.

If you borrowed £7,000 over five years at an interest rate of 8%, you’d pay £142 a month for 60 months.

Borrowing the same amount over two years at the same interest rate would mean monthly payments of £317.

The longer term might seem more affordable each month but you’d be paying more in total. Over five years you’d pay a total of £8,516 for a car worth £7,000. Borrowing over two years would mean you pay a total of £7,598 for the car.

So, you’d pay £918 more to spread the cost over five years instead of two.

Interest rates are fixed on hire purchase agreements.

You will know exactly what your repayments will be for the duration of the term. This can help you budget.

Yes, you can repay your HP loan early at any time. You might want to do this if you have a lump sum of cash you can use. Paying off your HP loan means you’ll become the owner of the car.

If your loan is £8,000 or less, there usually won’t be a fee for paying off your HP agreement early.

If your loan is for more than £8,000, there will usually be a fee for paying it off early. The fee is likely to be the lowest figure of:

If the lower of the two is the remaining interest, you won’t have saved any money by paying off the loan early.

In some circumstances, you might want to end the HP agreement early. For example, if you can’t afford it or decide you don’t want the car anymore.

You can return the car if you’ve paid for at least half of it. These rules are set out in the Consumer Credit Act, and it means you can simply hand it back to the finance company and walk away without having to make any more payments.

But, if you’ve not reached the halfway mark, you’ll have to pay the difference to the finance company.

You need to make sure the car is in good condition if you’re going to hand it back early. If it’s not, you could be charged for repairs.

If you buy a car on HP, it’s down to you to insure and maintain the vehicle.

The finance company will require you to have fully comprehensive car insurance. This will need to be in the same name as is on the HP agreement and V5C logbook.

You should shop around for car insurance. What’s covered and how much it costs can vary between insurers.

It’s not compulsory, but Guaranteed Asset Protection (GAP) insurance can also be a good idea if you buy a new car on HP.

The dealer may offer GAP insurance. This covers the difference between the amount you paid for your car and the amount an insurance company would give you if it was written off or stolen.

It can be handy if you buy a brand new car, because its value will start to fall straight away. Used cars will also decrease over time, but at a slower rate than new vehicles.

If the car is written off, the GAP insurance pay-out can be combined with your car insurance pay-out and used to pay off the HP agreement.

You’ll also need to meet all the usual requirements including MOT, car insurance, and vehicle tax.

When you buy a new or used car, the dealer or salesperson will probably try and sell you a finance deal.

But you don’t have to take out finance via the dealer — you might find a better package online. TotallyMoney has a range of car finance products and you can check your eligibility for each one online.

There’s plenty of choice out there, so getting several quotes is a good idea.

To compare the different offers look at the:

Whatever car finance package you take out, make sure you can afford the repayments.

If you miss one payment, the finance company will probably contact you to see what’s going on. If you keep missing payments, you’ll be marked as “in arrears”.

This will have a negative impact on your credit report and make it more difficult to borrow money in the future.

If you don’t pay back the arrears, the finance company will usually issue a default notice after about three months. The next step after the default notice will be to repossess your car.

If you’ve paid more than a third of the agreement, the finance company will need a court order before it can take the car away. But if you’ve paid less than one third of the total amount, it won’t need a court order.

The contract should tell you how much one third of the total amount is. Don’t get this confused with being a third of the way through the agreement.

It’s often possible to negotiate with an HP company if you’re struggling to pay. It may agree to extend the agreement so you can pay off the arrears over time.

If you’re currently struggling to make payments because of coronavirus, you should contact your car finance provider as soon as possible.

You can ask for a payment holiday of up to three months at any point before 31 October 2020.