Cheap hire purchase
Spread the cost of buying your car
If you need a new car but don't have the cash to buy it outright, hire purchase is one of the most popular ways to pay for it. It's been used to buy cars almost since there have been cars, but that doesn't mean it's the right deal for you. Here we break down the basics of hire purchase so you can work out whether it's right for you.
What is hire purchase?
Hire purchase (HP) is a form of new or used car finance, and works as its name suggests – you essentially hire the car over the contract period, with a view to purchase it at the end of the agreement.
This works in a similar way to a personal loan – as you're borrowing and paying off the full cost of the car – though here you won't own it until you've made the final payment. Instead the car is owned by the finance company – it pays the dealer on your behalf, then you pay it back.
The finance company uses its ownership of the car as security against the loan (like a mortgage), so if you fail to pay it can seize the car. This can mean it's easier to get than normal loans, though you'll usually need to pay a deposit (often 10% or more of the car's price). Dealers will sometimes offer a promotional contribution towards this – otherwise you'll need to consider how to fund it yourself.
As the dealer will be making money from the finance deal (usually it gets a commission from the finance company), you may find it offers larger discounts or contributions to the deposit on new cars. For used cars, it may mean you can haggle more off the sale price. Always be careful and make sure to calculate the total cost you'll need to repay after all interest has been added. This will then show the 'true' value of the discount.
Once you've found a car you want to buy, you'll know the amount you want to borrow. Here's an example to explain how it works, using a car priced at £14,000.
- You pay a deposit – 10% in this case (£1,400).
- You borrow the amount outstanding at a set interest rate and over an agreed repayment period – so £12,600 at 5% APR over three years.
- You then make set repayments each and every month to the finance company – £378/month.
- After three years and your final repayment, you take ownership of the vehicle after paying a transfer fee – £100 in this case.
Alternative types of car finance to consider
This guide focuses on hire purchase (HP), though before you go on, do check these alternative types of car finance to assess if they'd suit you better.
Broadly speaking, there are six different ways to pay for a car. The table has the key differences at a glance, before we run through the alternatives to HP in more detail.
|None – cash savings||N/A||N/A||You||No|
|0% credit card||Up to 25 months||No||You (though you'll still need to repay the debt)||No|
|Personal loan||Usually 1-7 years||No||You (though you'll still need to repay the debt)||No|
|Personal contract purchase||Usually 1-5 years||Yes (i)||The finance company, unless an optional final balloon payment is made||Yes|
|Hire purchase||Usually 1-5 years||Yes (i)||The finance company, until the final repayment is made, then you||No|
|Leasing/personal contract hire||Usually 1-4 years||Yes (i)||The finance company, at all times||Yes|
Sadly, there's no 'one-size-fits-all' answer to which wins (as much hangs on whether you want to own the car and other factors). However, we've included more information on each alternative to PCP below, to help work out which is right for you.
- Cash savings – the cheapest option for most cars
The clear winner if you want to own the car fully from day one, as you'll avoid paying any interest or taking out debt. Though if you're looking to buy a brand new car – which on average loses about 40% of its value by the end of the first year – and are likely to change it in the next few years, it's worth considering a leasing or personal contract purchase deal below. With these, the overall cost of ownership can work out cheaper.
- 0% spending credit card – no interest if you can get a big enough credit limit (and the dealer accepts cards)
Depending on the price of your new car, a 0% spending credit card could be the next cheapest way to borrow. Like paying in cash, you'll own the car outright, plus you'd be covered by Section 75 protection. However, you'd need to check whether the car dealer accepts payment by credit card, as not all do.
Unfortunately you usually won't know what credit limit you'll get before applying, and you should budget to pay the debt off before the 0% period ends, as the interest rate rockets after then. The longest cards typically offer up to 25 months at 0% – see our 0% spending cards guide for more information.
- Personal loan – usually cheapest if you need to borrow and want to own the car outright
This usually allows you to borrow higher amounts than a 0% credit card would offer, though you'll pay interest. However, repayments will be structured to clear the debt at the end of the term, which is usually between one and five years.
Once approved you'll receive the funds into your bank account, which you can then use to buy the car, so you'll own it outright. See our Cheap loans guide for best buys and full help.
Personal contract purchase (PCP) – can be good if you want to get a new car every few years, otherwise a hefty final payment and often more expensive overall than a loan
This is a popular way to get a new car, especially if you frequently change car and want to pay for it monthly. It's basically a loan, though usually cheaper each month as you won't be paying off the full value of the car. You also won't own it at the end, unless you choose to.
You set a term for the agreement and pay a deposit (for example, a three-year term with a £2,000 deposit). The finance company then provides a final value that the car will be worth at the end of the agreement (for instance, £6,000). These are then subtracted from the cost of the car to work out how much the loan will be (for example, you'd owe £12,000 over three years for a £20,000 car).
There's usually a mileage allowance (for instance, 8,000 miles a year), but provided you stick to that and don't damage the car, you can return it and walk away at the end of the agreement. Alternatively, you have the option to pay the final value to own it, also known as a balloon payment.
As the dealer will be making money from the finance deal, you may find it offers larger discounts or contributions to the deposit on new cars. For used cars, it may mean you can haggle more off the sale price. Always be careful and make sure to calculate the total cost you'll need to repay after all interest has been added. This will then show the 'true' value of the discount. See our full guide on cheap personal contract purchase for more information.
- Car leasing/personal contract hire – low monthly rental payments, but you'll never own the car (nor have the option to)
This is a way to get a brand new car for a monthly payment, though this is essentially a long-term rental, so you'll never own the car – nor have the option to buy it. Instead you'll pay an initial deposit followed by a monthly amount for the duration of the contract, which is usually over one to four years.
As with PCP, you'll need to choose a mileage allowance (for example, 8,000 miles a year) and you're responsible for the car's upkeep. At the end of the agreement, you simply return the vehicle (though you could be charged if you've exceeded the mileage or damaged it). See our Cheap car leasing guide for full help.
Hire purchase need-to-knows
If you think hire purchase (HP) is right for you, here are the need-to-knows to understand before you opt for a new agreement.
1. Pay the deposit with a credit card (even just 1p) for valuable protection – for cars worth up to £30,000
You don't need to pay for the whole car on the card. Just put some of the deposit, even as little as 1p, on a credit card, and you get powerful extra protection if something goes wrong down the line. This is because you're then covered by Section 75 laws.
Provided that the total cost of the car you're buying is between £100 and £30,000, paying anything towards it by credit card means the card company (or finance company in some cases) is equally liable along with the dealer if things go wrong.
However, this isn't always straightforward. Some dealers don't accept credit cards and some may only allow you to pay a limited amount by card. So figure out how important this is, and ask your chosen dealer if it can accept cards before deciding how to pay.
If you need to borrow to pay for the deposit, a 0% spending card is the cheapest way as, done right, there's no interest. For full help and top picks, see Best 0% spending cards.
When you select a car, your finance company – whether it's an online broker or you're getting finance through the dealer – will then pay the dealer the amount you've agreed on for the purchase price, less any deposit.
You'll then pay the finance company fixed monthly repayments over, usually, one to five years. Remember the finance company owns the car at this point.
Once all repayments have been made, you pay a final fee – referred to as the 'option to purchase' fee – to own the car outright. This covers the cost of transferring ownership to you, and is typically about £100. It should be mentioned in the HP agreement you sign at the start – but if you can't find it, make sure you ask the dealer or finance company how much the fee is.
Let's take an example of how much you'd pay in total…
Say you're buying a car priced at £14,000:
- You pay a 10% deposit of £1,400, leaving £12,600 left to pay.
- You borrow £12,600 over three years.
- You get a 5% APR deal, meaning payments would be £378 a month (£13,608 for the three years).
- After three years you can take ownership of the vehicle, paying a transfer fee of £100.
- So in total you'd pay £15,108.
Remember! The car is owned by the finance company until the final payment and 'option to purchase' fee have been paid. Until then, you have no legal right to sell the car (though the finance company may let you if you ask, and use the proceeds to fully settle the finance agreement).
3. During the HP agreement you're usually responsible for insurance, parking/speeding tickets and general upkeep
The finance company remains the legal owner during the HP agreement, but you're recorded as the registered keeper – so you'll be responsible for any parking or speeding tickets, servicing costs and insuring the car. So you'll need to factor these costs in on top of your monthly payment.
Dealers will sometimes throw in service and maintenance packages, warranties and insurance, though always check these are free, or represent good value. See our Cheap car insurance guide for full help in cutting insurance costs.
When you apply, the lender will normally do a credit check to decide whether to lend to you, and this check will appear on your credit file as an application for credit.
Credit checks for HP aren't usually as stringent as those for personal loans. This is because all car finance is secured on the car – if you don't pay, the lender can just come and repossess the car, whereas for loans there's no security, so it'd need to chase you through the courts.
If you find you're not able to make repayments, always contact the lender – ideally before the next payment is due. If it knows you're struggling, it should help you by offering an alternative and affordable repayment plan.
If you miss a payment, it's likely the lender will contact you to see what's wrong. If you keep missing payments, it'll mark you as in 'default'. Once this happens, it'll usually take back the car quite quickly, as to leave the vehicle with you while it chases payments risks the car's value depreciating even more.
As well as the company taking the car, if you fail to keep up repayments, you'd get a default mark on your credit file, which could affect your ability to get a mortgage or other credit. See our Credit scores guide for more info.
Known as a voluntary termination, there's a little-known clause in the Consumer Credit Act that allows you to get out of an HP agreement early. Provided you've repaid at least half the total amount owed, you can terminate the agreement and return the car to the finance company.
This is a handy clause in an HP contract if you find:
- You no longer need the car.
- You want to cut costs.
- You can't afford repayments.
- You can get a similar car that would cost less than the total of your remaining payments.
If you decide to do this, the car should be in good condition when you hand it back. If not, you'll have to pay for any outstanding repair work that needs doing.
If you're not yet halfway through the payments, you'll need to pay the amount outstanding to reach halfway before you can get out of the agreement.
Important! If you decide to end the agreement early, make sure to get everything in writing and keep a copy so nobody can claim you have defaulted on your payments.
Where can I get an HP deal?
There are two main options here. The most common is to get the finance through the dealership you're buying from. However, before you start, it's worth getting quotes from online brokers first, so you can compare with the dealer's offer. It's also worth taking a copy of the cheapest quote along so you can ask it to match or beat it.
Important. Beware of 'representative' APR – you could get a MUCH higher rate. Only 51% of successful applicants have to get the advertised interest rate, so up to 49% could get a more expensive hire purchase (HP) deal than the one they applied for (if they're accepted at all). So you could apply for 4.4%, be accepted, and be given a 17.9% APR. Unfortunately the only way to know the rate you'll get is to apply, though always use the lender's eligibility calculator to see your acceptance odds first.
HP deals can be found from a handful of lenders and brokers. These are handy to get an idea of the prices and repayments you might be looking at on your ideal car. Brokers supply the finance through a variety of lenders and offer a wide range of deals, including those for buyers with a tarnished credit history.
Some brokers will also be able to source vehicles for you, as well as finance. But you can still get your car from any dealer in the UK, and just use the broker for the loan. Funds will be sent to the dealer after the finance agreement's signed.
|Cheapest existing-customer deals. If you've had its current account for at least three months.|
|Bank of Scotland / Lloyds Bank||
|Top 'open to all' deals. All providers here have eligibility calculators allowing you to check your acceptance odds before applying.|
|Motiv*||Scans 11 lenders to give you a personalised price|
|Flow Car Finance*||9.9% (1-6 years)|
- Getting an HP deal through a franchised dealership
In a franchised dealership, finance deals are usually arranged through the car finance arm of a manufacturer – for example, Ford Credit, or Volvo Financial Services. It's definitely worth looking at what these dealerships can offer you on a finance deal, especially if you're buying a new car.
If this is the case, it's not uncommon for the manufacturer to give £500-£2,000 to you as a deposit contribution, and also offer 0% finance. If you don't qualify for 0% finance, you'll usually get an advertised APR offer of about 5% – though this is representative, so if you have a poorer credit history, you may be offered a much higher rate.
- Getting an HP deal through an independent dealership or car supermarket
Many independent dealerships and car supermarkets get their finance from big banks' consumer arms. Black Horse (part of Lloyds) and Santander Consumer Finance, for example, supply finance deals to non-franchised dealerships.
These finance providers aren't tied to manufacturers, and therefore can't offer the heavily subsidised 0% finance or deposit contributions that the car companies' finance arms can. If you go to one of these dealerships, expect a representative APR of somewhere between 5% and 10% – or more if you've a bad credit record.
It's a competitive market out there – check what's available online and from dealers, and ask yourself what you can really afford. It's vital you can afford the repayments before you commit. With all these types of finance, if your application is accepted, finance is sent directly to the dealer.
Want to complain about your car finance provider?
If you think your car finance agreement was mis-sold to you, see our dedicated guide on how to reclaim car finance.
Alternatively, you can also complain if your car finance provider has taken the wrong amount in payment, treated you unfairly or its service has been atrocious. It's always worth trying to call the lender first to see if it can help, but if not...
Hire purchase FAQs
If you buy a car using hire purchase (HP) and realise it's faulty, it's worth returning it and asking the dealer to fix it. If the dealer refuses or tries to charge you, go to your HP provider.
Your HP finance provider legally owns the car until the loan is repaid, so your contract is with it – not the dealer that set up the agreement. This means your HP provider is legally responsible for any problems with the car.
Buying on HP means you'll specifically need to quote something called 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. You can quote this legislation when making a claim for the faulty car against your HP provider.
So, by all means try to resolve the problem with the dealer, but if this doesn't work, try the HP provider, which is the company you're making repayments to. If you're still not happy, take your complaint to the free Financial Ombudsman Service.
There are three main types of gap insurance policies, but they all have the same general aim. If you have a crash, or your car's stolen, your insurer will usually only pay out the amount the car is worth at that time.
Gap insurance is a policy you can buy that pays out an amount above this, to get you back to the original sale price of the car, to the amount you have outstanding on finance (which can, at times, be greater than the car's worth), or to the amount it would cost to buy the car new now.
It's offered because cars depreciate really quickly – on average new cars lose 60% of their value within three years.
It's not mandatory, so you need to decide if it's worth it. Always compare policies as those sold by dealerships tend to be expensive. See our guide to gap insurance for full info and cheap providers.
Clever ways to calculate your finances