When you’re looking for a new car, there are a range of finance options to choose from. One of these is hire purchase (HP) finance, alongside other options like personal loans for a car purchase and personal contract purchase (PCP).

Here we’ll focus on what HP is and how it works. We’ll also look at the benefits of hire purchase and anything else you need to consider.

What is Hire Purchase Car Finance?

HP is a type of car finance. It allows you to spread the cost of purchasing a car over a specific contracted period. You’ll pay a deposit towards the value of the car and then pay fixed monthly payments until the end of the contract.

Once the contract is up, there will usually be a small ‘option to purchase’ fee that’s included in your final payment.

How does HP finance work?

HP car finance works like this:

• Choose a deal: Take a look at the available cars and consider the potential HP deals available to you.
• Make a deposit: Once you’ve chosen your car and HP car finance deal, you’ll need to make a deposit towards your car. The more deposit you can put down, the less your monthly payments will be.
• Make monthly payments: Each month you’ll make a fixed payment towards the cost of the car. Every payment you make gets you closer to owning the car outright.
• Final payment: Once you make your final payment, there will be a small ‘option to purchase’ fee that’s included as part of the last payment. You’ll then own the car outright.

What do I need to apply for HP finance?

To apply for HP car finance, you’ll usually need:

• Your driving licence
• Employment details
• Bank account details
• Three years of address history.

Pros and Cons of Hire Purchase

There are both advantages and disadvantages of HP. They include:

Advantages:

• You own the car at the end of your contract
• Fixed monthly payments
• Usually there’s no mileage restriction, so you won’t face excess mileage charges as you can with PCP car finance
• You may be able to get HP with a poor credit history.

Disadvantages:

• You only own the car once you’ve made your final payment
• You can’t sell or modify the car until you own it officially
• Often monthly payments are higher than PCP as there is no optional balloon payment at the end of the contract.

How can I keep my HP payments low?

You can do a number of things to help keep your HP payments low, including:

• Putting down a bigger deposit: The more you can pay off at the start of your HP contract, the less you’ll need to pay each month.
• Opting for a longer term: By spreading the cost over a longer period of time, your monthly payments will be less. But you will pay more in interest over the term of the contract.
• Having a good credit score: The deal you’re offered will be based partly on your credit history.

Can I pay off Hire Purchase early?

Yes, you can pay off hire purchase early, but you may need to pay a fee. The good news is that this fee is capped by the Consumer Credit Act.

According to the Act, the most you can be expected to pay is the outstanding capital on what you borrowed (but not the interest), plus whichever is the lowest of the following three amounts:

• 1% of the amount repaid early
• 5% of the amount repaid early if there are less than 12 months left on the contract
• The remaining interest.

If your early repayment is for less than £8,000 you shouldn’t be charged any extra fees at all.

Other Car Finance Options

HP car finance isn’t the only option available to you. You can also consider PCP or a car loan. With PCP, your monthly payments will likely be lower, and you may be able to get a more expensive car. But you will need to make what’s called a balloon payment at the end of the contract to own the car outright. With a car loan (personal loan)), you’ll buy the car outright. You then pay the loan back each month, plus interest, through monthly repayments.

How Asda Can Help

At Asda, we’re here to help you understand all things finance. As well as assisting you with a personal loan to buy a car, we offer plenty of financial support so you can make the right financial decisions for you.

Compare car finance deals using our trusted panel of lenders today!

Hire Purchase FAQs

Is hire purchase a good idea?

You’ll need to weigh up the advantages and disadvantages of hire purchase before you decide if it’s right for you. With hire purchase, your monthly payments are likely to be more than with PCP, but there’s no need to make a balloon payment at the end of the contract.

With HP, you also won’t own the car until the end of the contract whereas with a personal loan, you own the car from the outset.

Do you own the car at the end of HP?

Yes, you own the car at the end of your hire purchase agreement. Usually, there is a small ‘option to purchase’ fee included in your final payment. Once you’ve made this, the car is yours.

Can I sell a car on hire purchase?

With HP, you can’t sell the car until you’ve made the final payment. Legally, the finance lender is the owner of the car until you’ve paid it off in full.

Should I pay off my hire purchase early?

It’s up to you. If you decide to pay off your hire purchase agreement early, you’ll own the car outright earlier. But there are fees to pay. Fortunately, these charges are capped by the Consumer Credit Act, so the car finance company can’t charge exorbitant fees.

Can I get out of a hire purchase agreement?

Yes, you can terminate a hire purchase agreement in writing and return the car. It can be useful if you can’t afford the payments anymore.

You have to pay all the payments due up to the time you end the agreement. If you’ve not yet paid for 50% of the car, you will likely have to pay up to this cost as the lender is entitled to this amount under the agreement.

What happens if you can't pay hire purchase?

With a hire purchase agreement, your contract will usually include the condition that the car doesn’t belong to you until you’ve made the final instalments. If you fall behind with payments, the lender may be able to repossess the car.