The FleetPro Blog: What Is Hire Purchase?

We explain how Hire Purchase works

What Is Hire Purchase?

What Is Hire Purchase

What Is Hire Purchase

21 July 2020
An oldie but a goodie!
We explain how Hire Purchase (HP) works

Hire Purchase has been around for a long, long time, but being an oldie doesn't stop it being a goodie.

So What Is Hire Purchase?

Hire Purchase (HP) is a simple way to finance a car (or van) over a fixed period of time ('term') in a way similar to a bank loan.

Unlike a bank loan, ownership of the car stays with the finance company until you've made the final payment on the finance agreement.

In typical arrangement the buyer is literally hire-purchasing the vehicle, in other words, hiring it for a time with a view to buying it when the agreement is completed.

Usually a deposit is required - typically 10% of the purchase price, though it could be a multiple of the monthly payments (e.g 3 payments in advance followed by 35 more over a 36 month agreement).

What's In Hire Purchase Payments?

Typically you do the work sourcing the vehicle so the repayments just cover:

  • The purchase price (less any deposit)
  • Interest charges on whatever you have borrowed
  • Sometimes the finance company's profit margin (though this might be just included in the interest charges anyway)

The finance company will normally exclude from the repayments the annual Vehicle Excise Duty renewals (the 'tax disc') over the life of the agreement, so you will have to pay for these yourself.

Advantages of Hire Purchase

Because the monthly payments include the whole price (less deposit), you repay the total amount borrowed at a faster rate than in deferred purchase plans such as contract purchase.

This means that interest charges are lower than deferred purchase finance (assuming the same interest rate applies) because less money is outstanding after each month's repayment than would occur in contract purchase.

At the end of the HP agreement you can take ownership of the car by making the final payment.

This means you are free to sell the car and you could profit from prudent management of the vehicle if it is worth more than average used cars of its age and mileage.

Disadvantages of Hire Purchase

Because the finance repayments cover the full purchase price (less deposit), rather than just depreciation (as in contract purchase), the monthly repayments are more than those of contract purchase.

If the contract is terminated earlier than expected then you may be required to pay a penalty for early termination (as compensation to the finance company for the loss in interest charges that the finance company would have received if the finance agreement had run to its full term).

Should You Lease Or Buy?

You can see the cost of buying a car on HP compared to contract purchase or leasing it through Contract Hire using our lease comparison tool.