Hire Purchase (HP)
Hire Purchase (HP) is a form of car finance in which you have to pay an initial deposit upfront to hire the car with an option of buying it at the end of your contract. This type of car finance is just like a personal loan, where you make monthly repayments for a period of time.
The repayments have to be done between one to five years which has a fixed interest rate. You can buy a car with this car finance option if you have a bad credit rating as well. As you are taking out a loan against the car, the lenders are at less risk here. They can take away the car if you miss any repayments.
Hire purchase as the name suggests let you hire a car over a set period of time by making regular monthly payments. At the end of your contract, you can purchase the car. You don’t get to be the owner of the car in the hiring period, because you are still making the payments. The finance company are the owner of the car for that time period. Once you make the final repayment the ownership is transferred to you by the finance company.
Working of Hire Purchase
Before going for hire purchase, you need to select a car which you need to buy, this gives you an estimate of how much you need to borrow. After you have done that you should;
Make a deposit – The lenders would ask you for paying a deposit upfront to hire a car. The deposit amount could be 10% of your car’s worth or it can be a fixed amount that has been set by lenders. There are few lenders who accept a minimum deposit (less than 10% of the car’s value).
The time period to make monthly instalments – You have to choose a monthly repayment plan. You can choose a term between 12 to 60 months according to your convenience. However, you should select a monthly payment amount and time period which you can afford. The interest rate is fixed so you should choose your time period for the loan carefully so that you don’t run out of money for your daily expenses.
Pay the last instalment and own the car – At the end of the contract when you make your last instalment, you get to be the owner of your car.
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Pros of Hire Purchase
- The interest rates are fixed, so you know what you are going to pay monthly
- The repayments terms are flexible
- Low deposit amount compared to other car finance
- No mileage restrictions during the contract term
Cons of Hire Purchase
- You don’t get the ownership of the car till you repay all the loan amount
- You’re not allowed to do any modification during your contract without the finance companies approval
- If you due to any reasons fail to make the repayments, the finance company can repossess your car
- Monthly repayments are higher than other car finance options
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