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What is Hire Purchase (HP)?

HP stands for Hire Purchase and does exactly what it says on the tin. It consists of both elements of a lease and a loan, and is probably the most common form of car finance in the UK.

How does HP work?

When you find the vehicle you want to buy, typically you will agree with the dealership how much deposit you will pay. The balance is then paid off over an agreed period of time in regular, monthly instalments.

All the time you are making repayments, you are, in effect, “hiring” the use of the car.

Once the final payment has been made, the vehicle belongs to you - the “purchase” side of things. At this time you may also have to pay an admin fee or a small option-to-purchase fee, but this will all have been made clear at the time of taking the agreement.

Because you do not the own vehicle outright until you have made the final payment (as it belongs to the finance company), unless you have your lender’s agreement, you are unable to sell the car privately while you are still making finance repayments on it. You can, however, part exchange the car at any time or settle your agreement early, but you’ll have to obtain a settlement figure and make sure this is paid off in full.

How is HP different to other car loans?

Hire Purchase is unlike some other forms of car loan, such as a personal contract purchase (PCP) deal, for example. This is because the residual value of the vehicle is not taken into account when calculating repayments.

Your HP monthly payments are calculated by the current retail price of the vehicle, how much deposit you have paid, any fees due and the term of the agreement.

Who is HP suitable for?

Whether hire purchase is suitable for you depends on your individual financial circumstances. It can, however, often be easier to get finance with a hire purchase deal than with other forms of unsecured lending as the monthly repayments are secured against the vehicle.

This is because the lender has a form of security in the car. This typically means:

  • HP rates can be more attractive than some other forms of loans;
  • It may be suitable for people who don’t have the cash to pay for a vehicle;
  • Those who have had trouble getting approved for loans previously may still be accepted for a HP agreement.

Hire Purchase may also be useful for people who like to budget, as you will know exactly how much your monthly repayments will be over the term of the loan.

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