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Vehicle finance option - Hire Purchase (HP)

Unlocking the potential of Hire Purchase

If you’re exploring finance options for your next vehicle purchase, you’ve likely come across the term ‘Hire Purchase’. But what exactly is it, and how does it work? In this comprehensive guide, we’ll dive into the ins and outs of Hire Purchase, shedding light on its benefits and potential pitfalls. 

What is Hire Purchase?

At its core, Hire Purchase (HP) is the most common form of vehicle finance. It’s essentially a hire agreement between you (the customer) and a finance company, with the vehicle serving as collateral. The unique aspect of HP is that it provides you with the opportunity to own the vehicle at the end of the agreement, contingent on the payment of the ‘option to purchase’ fee. 

How Does Hire Purchase Work?

The mechanics of a Hire Purchase agreement are straightforward. You commit to paying off the full value of the vehicle, along with interest, through fixed monthly instalments. The repayment period is typically agreed upon beforehand, usually spanning from 12 to 60 months (1 to 5 years). However, in some cases, it can extend up to 84 months (7 years), allowing for flexible terms that align with your budget and preferences. 

Once you’ve made all the repayments, you’ll have the opportunity to own the vehicle outright by paying the ‘option to purchase’ fee. This fee essentially covers the administrative costs of transferring ownership to you. 

Security and repossession

It’s important to note that the debt in a Hire Purchase agreement is secured against the vehicle itself. This means that if you fail to make the agreed payments, the finance company has the right to repossess the car to help settle the outstanding debt. 

The pros of hire purchase

  • Flexible repayment terms

    Hire Purchase offers the flexibility of tailoring your repayment schedule to match your monthly budget.

  • Low/No Deposit Required

    In some cases, Hire Purchase doesn't require a significant upfront deposit, making it more accessible to a wide range of buyers.

  • No Mileage Restrictions

    Unlike some other finance options, Hire Purchase typically does not impose mileage limits, giving you the freedom to drive as much as you'd like.

  • Simplicity

    Hire Purchase is relatively simple to arrange and understand, making it an accessible choice for many buyers.

  • Credit-Friendly

    If you have a less-than-perfect credit history, Hire Purchase agreements can often be easier to obtain compared to unsecured loans, as the vehicle itself acts as collateral.

The Cons of Hire Purchase

  • Risk of Repossession

    The most substantial drawback is the risk of vehicle repossession if you fail to make payments, as the loan is secured against the vehicle.

  • Credit Impact

    Non-payment or late payments can negatively impact your credit rating, affecting your ability to secure credit in the future.

  • Higher Monthly Payments

    In some cases, monthly payments in a Hire Purchase agreement can be higher than those associated with other car loan options.

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