It’s easy to be confused by the number of different finance options that are available when it comes to buying a new car.
Although the simplest available option is still hire purchase (HP, also known as ‘conditional sale’ by some manufacturers), there’s a bit more to it than many buyers might expect.
People usually expect hire purchase to be a simple monthly repayment of a borrow balance (plus interest) over a set period that results in you owning the car at the end. Other finance packages usually have deferred (or balloon) payments at the end of the agreement that can help to keep the monthly payments down, but they mean you don’t own the car after your agreement is finished.
Although many customers like the idea of HP because they will own the car at the end of an HP agreement, it isn’t always the best value option because it seldom attracts the manufacturer subsidies that PCPs do. That’s because PCPs encourage owners to change their vehicles more often, which is obviously to manufacturers’ benefit. So you’ll end up owning a car bought on HP, but you might not get the best bang for your buck.
HP in practice
Every carwow dealer you talk to will offer at least one HP deal, depending on the vehicle in question and the strength of the customer’s application (ie deposit and credit score). The best rates will be offered on new or relatively new cars because the agreement is secured on the car itself.
If you’re buying a used car, each finance company will have its own criteria on how old a vehicle can be at the start and the end of the agreement, and how high the mileage can be.
In its simplest form, you pay a deposit and the rest of the agreed balance is normally spread over a period of up to five years, although longer agreements are sometimes available.
Interest will also be included in the monthly payments, although interest-free plans are becoming increasingly common.
What happens when the agreement ends?
At the end of the agreement you simply make the final payment and then the car is yours to do with as you like. There are no balloon payments to worry about with standard HP, so you know that your final payment will be the same as you have been paying all along.
Until you have made that final payment, the vehicle is still the property of the finance company.
What if I want to change my car before the end of the agreement?
Whichever way you look at it, the outstanding balance has to be paid before you can sell your car. More often than not, the dealer will do this for you as part of the deal on your new car as they cannot take the car from you in part exchange unless they know it is clear of finance.
The good news about settling your agreement early is that you will save money on interest. You only pay interest for the time that the agreement is ‘live,’ so you will need to obtain a settlement figure from the finance company to find out how much is outstanding at a particular time. It isn’t as simple as adding-up the outstanding monthly payments, as they would include the interest that you would have to pay for the full duration of the agreement.
If you are settling early, you do not have to pay the remaining interest. This is the case whether you are trading-in your car or if you just want to pay off the agreement early and keep your car.
Do I have to take the dealer’s finance?
While you are not obliged to take the finance on offer from the dealer you are buying from, you are likely to get a better deal if you do. Dealers get commission on the finance they sell, so it gives them an extra income stream that can be factored into the overall deal. If you go to an outside lender, you may get a slightly lower interest rate, but it may not work out as better overall deal for you.
As with any finance deal, it pays to do your homework.