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Hire Purchase | 13 Advantages and Disadvantages
Understanding the different forms of car finance can be tricky. Here at Clifton Private Finance, our experts have delved deep to find all the pros and cons of hire purchase (HP) so that it’s easy for you to weigh it up when choosing how to pay for your car.
In a nutshell, here are the advantages and disadvantages of hire purchase:
Advantages:
- You Own the Car Eventually: After completing all payments, the car becomes yours.
- No Balloon Payment: Unlike PCP, there’s no large payment required at the end of the contract; you’ve paid for the car all along.
- Fewer Limitations: No mileage limits, and fewer restrictions compared to other car finance options (like PCP or PCH).
- Easy Budgeting: Fixed monthly payments and interest rates, making it simple to manage your finances.
- Excellent for Building Credit: Regular HP payments can improve your credit score.
- A Car to Sell: After the agreement, you own an asset (the car) that can be sold, traded, or used as collateral.
- Buy Any Car: HP can be used for both new and used cars, with few restrictions on car value.
Disadvantages:
- Higher Monthly Payments: Payments are generally larger because you're paying for the full cost of the car.
- Deposit Requirement: HP usually requires a deposit (typically 10%), which can be a significant upfront cost.
- Maintenance Responsibility: You’re responsible for all repairs and maintenance of the car.
- Risk of Repossession: If you fail to make payments, the car can be repossessed.
- Inflexible Payments: Once agreed, HP contracts can be difficult to change or adjust.
- Increases Income-to-Debt Ratio: A large HP agreement can negatively affect your ability to secure other loans due to a higher income-to-debt ratio.
That's a brief overview - now let's go through each one in more detail...
And to get an independent comparison on the best rate you could achieve for your car purchase:
Contents
- HP Advantage - You Own the Car (Eventually)
- HP Disadvantage - The Payments Are Higher
- HP Advantage - No Balloon Payment
- HP Disadvantage - That Deposit
- HP Advantage - Fewer Limitations
- HP Disadvantage - Maintenance is All On You
- HP Advantage - Buy Any Car
- HP Disadvantage - Risk of Repossession
- HP Advantage - Easy Budgeting
- HP Disadvantage - Payments can be Inflexible
- HP Advantage - Excellent at Building Credit Score
- HP Disadvantage - Increases Your Income-to-Debt Ratio
- HP Advantage - A Car to Sell
- Summing Up the Pros and Cons of Hire Purchase
HP Advantage - You Own the Car (Eventually)
Hire purchase is clear in its aim - to provide a means of financing a car purchase that ends in you owning the car. With options such as personal car purchase (PCP) or personal car hire (PCH) potentially leaving you with nothing at the end of the contract, HP confidently delivers.
Make your payments and you’re going to end up owning the car.
There are a few things to take note of.
- With a hire purchase agreement, the ownership of the car doesn’t transfer to you until the end of the contract, which means that until you’ve made your final payment it still belongs to the finance company and you’re effectively hiring it from them (which is why it’s called ‘hire purchase’).
- Secondly, there may be a nominal fee to cover the legal transfer of ownership (usually between £50 and £150) which is added on to your final payment.
Other than that, though, the car will be yours to do with as you wish, including selling it on if you want to recoup some of the money you’ve spent on it over the years.
HP Disadvantage - The Payments Are Higher
One thing that may turn people away from HP is the noticeable size of the monthly payments when compared to some of the other options. This is because with hire purchase you are buying the whole car and not just paying for its use.
Bringing down the cost of those monthly payments is possible, though. Consider:
- Paying a larger deposit - When you pay a larger chunk up front, not only does it lower the amount you are borrowing (and thus, the size of each month’s payment), but it also means you’re going to pay less in interest, again reducing the monthly payment.
- Getting longer terms - HP agreements are in the range from 24 months (2 years) to 60 months (5 years), with most of them falling in the 3-4 year bracket. If the monthly payments seem high, you could ask for a longer term contract, which’ll spread the cost across more time and lower the burden each month. Do bear in mind though, that doing this will increase the overall interest paid, even if your APR stays the same.
- Improving your credit rating - Interest rates are personalised, strongly influenced by your credit history. If you take the time to improve your credit rating (usually just a few months) then you could bring the APR of your hire purchase agreement down and save significantly each month.
- Shopping around - You don’t have to accept the HP offer that’s given to you by the dealership. Speak to Clifton Private Finance to get advice from one of our expert team who will be able to find a better deal for you within minutes. It’s definitely worth the time.
HP Advantage - No Balloon Payment
Balloon payments, found most frequently with PCP car finance, can be worrying, especially as the end of the contract comes closer.
With HP, you’ve got no worry about a large balloon payment to secure your car at the end of the agreement - you’ve been paying off the debt all along and once that last payment is made, the car is yours.
HP Disadvantage - That Deposit
Of course, the flip side of the lack of balloon payment is the HP deposit, or upfront payment, that you have to pay when you first buy the car.
This is usually 10% of the car value, though you may want to negotiate a different deposit to suit you.
Remember:
- A higher deposit means lower monthly repayments
- A lower deposit means higher monthly repayments
Different dealers and different finance providers will have their own levels of flexibility on the deposit payment. It’s important to not forget that you can often use your existing car to cover the deposit through part exchange, which can take a good chunk out of the deal.
If you are looking at a hire purchase agreement that has no deposit, do be aware that the monthly payments will be higher and the interest rate you will be offered may be larger, too. If you can afford to provide at least a small deposit, then it’s definitely worth it in the long run.
HP Advantage - Fewer Limitations
Different car finance arrangements can have different levels of limitation - most usually in the form of mileage.
Mileage limits are put in place on PCP and PCH contracts to limit the depreciation of the vehicle and make sure when it gets back to the dealership at the end, it’s still relatively new.
Fewer limitations however, don’t mean none.
Remember that the car is still used as security on the finance, and it’s the property of the finance company until the very last payment is made. With this in mind, there may be restrictions on taking it out of the UK and EU, and you won’t be able to sell it without making an arrangement to pay off the HP in full.
Nonetheless, hire purchase is the least limiting of all the standard car finance agreements.
HP Disadvantage - Maintenance is All On You
Repairs and regular maintenance is completely your responsibility when you take out a hire purchase deal. That means if the car needs new tyres, a windscreen fix, or even a new clutch, that’s something that’s going to have to come out of your pocket.
Depending on the age of the car, you may want to put some extra money aside each month to keep the car going.
Of course, with a new car, you’ll have a warranty and the knowledge that all the parts are shiny and brand new - ultimately, nothing should go wrong. However, over the years you’ll still need to factor in servicing costs, tyres, and brakes.
HP Advantage - Buy Any Car
Both personal contract hire (PCH) and personal contract purchase (PCP) are geared towards getting a brand new car. While the flexibility of PCP means it can be obtained to buy a used car, only higher value cars will be considered.
So whether you’re looking for a brand new car worth £50,000 or more, or shopping around for a cheaper second-hand get-around, hire purchase offers a finance solution.
HP Disadvantage - Risk of Repossession
Like all specialist car finance, hire purchase is an assed-based finance arrangement that is secured using the car as collateral.
Hire purchase is a serious long-term financial commitment and you should plan your finances and consider the impact of an agreement of this length before signing.
HP Advantage - Easy Budgeting
The structure of monthly repayments, however, make budgeting for hire purchase a simple matter. With fixed interest rates and fixed monthly payments, the amount you have to cover each month will never change.
HP Disadvantage - Payments can be Inflexible
HP contracts are quite strict and once in place can be inflexible. It is important that you communicate early if you feel that you will be unable to make a payment so that you are seen as responsible and have the maximum time to make an arrangement.
HP Advantage - Excellent at Building Credit Score
Meeting your regular obligations with a car finance deal, such as hire purchase, is a significant factor in calculating your credit score, opening the door to more substantial finance, including mortgages, personal unsecured loans, and even business finance.
Maintaining regular hire purchase payments can become part of long-term financial planning.
HP Disadvantage - Increases Your Income-to-Debt Ratio
Affordability, calculated as your income-to-debt ratio, can be greatly impacted by a sizeable hire purchase agreement.
If you are looking to obtain additional financing, such as a mortgage, then it is important that your income-to-debt ratio is low.
Balancing the improvement to your credit score with the immediate impact on your affordability is important when considering hire purchase.
HP Advantage - A Car to Sell
One of the financial advantages of hire purchase is the asset (the car) that you are left with at the end.
There are even options, such as asset refinancing, whereby you can use your car as security on a further finance arrangement, keeping the car for use while using it to leverage a loan.
Summing Up the Pros and Cons of Hire Purchase
Hire purchase is an excellent way to buy a car. With flexibility over the deposit payment, a length of contract to suit you, and clear monthly repayments that aid personal budgeting, a well-managed hire purchase agreement is perfect for anyone looking to spread the cost of a new or used car.
HP can be quite inflexible and missing payments can lead to losing the car and all the hard financial work that’s been built up. It’s important when considering a hire purchase contract, that you think about the length of the deal and are confident that you can still manage it in the months, or years, to come.
Contact Clifton Private Finance today for the best car finance deals.
