Hire Purchase

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What Is Hire Purchase?

Hire Purchase (HP) is a way of financing a car over a fixed period on a basis similar to a bank loan. Unlike a bank loan though, ownership of the car remains with the finance company until the final payment is made on the hire purchase agreement.

In a typical hire purchase arrangement you are literally hiring the car for a period of time and only become the owner once all the payments are made and the agreement is complete.

You make monthly repayments that cover all of the cost of the car, plus interest charges. The final payment will also contain an amount which, once paid, transfers ownership of the car to you.

Normally the supplier of your car will arrange the HP agreement for you. Usually a deposit will be required (typically 10% of the purchase price). The finance company then lends you the rest of the purchase price but in a different way to a bank loan. The finance company:

• buys the car from the supplier;
• hires the car to you for an agreed period in return for monthly payments; and
• transfers ownership of the car to you at the end of the hire period once you have made the final payment.

Advantages


At the end of the agreement the car is yours to keep or sell as you please.

Because in your monthly repayments you have repaid the whole of the amount originally borrowed you will have kept the interest charges to minimum by comparison with a Personal Contract Purchase agreement (leaving aside the rate of interest charged).

Disadvantages


Because the finance repayments cover repayment of the full purchase price, rather than just depreciation, the monthly repayments are typically more than those of Personal Contract Purchase.

If you fail to complete the agreement then the car remains the property of the finance company and can be repossessed by the finance company (subject to certain requirements).

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