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What is Hire Purchase (HP) finance?

Hire Purchase (HP) finance can help to split the cost of a new car into a deposit and a number of monthly payments. Once you’ve made the final payment, the car will be yours to keep or sell on, unlike Personal Contract Purchase (PCP) finance.

The amount you’ll pay as part of an HP agreement will depend on the price of the car, the size of the deposit and the number of monthly payments. Pay a large initial deposit or spread the cost over a longer period and your monthly payments could be reduced. If you’d rather pay a smaller deposit, or plan to pay for your new car in only a short time, your monthly payments could be much larger.

What’s the difference between HP and PCP finance?

The main difference between HP and PCP finance is that – at the end of an HP agreement – you’ll have paid for the car’s full price and it’ll be yours to keep. PCP agreements will require you to return the car to the dealer or pay an optional final payment if you’d rather keep it. As a result, HP monthly payments are often higher than a comparable PCP deal.

HP in practice

Typically, HP agreements consist of a deposit and a series of monthly payments over a period of as much as five years. Some dealers will offer longer agreements, however, while finance on used cars will depend on how old the car is, its condition and how many miles it has covered.

Every carwow dealer will offer HP finance on a selection of new cars although the best rates are often reserved for models a manufacturer’s keen to sell in large numbers. This can mean brand new cars are offered with equally attractive finance packages as old models that are about to be replaced.

Regardless of whether you finance a new or used car, a set amount of interest will usually be included in the monthly payment amount. Specific details will be outlined in the contract you’ll sign with a dealer before being handed the keys. Interest-free HP finance packages are available that mean you pay no more than an outright cash price.

What happens when a finance agreement ends?

At the end of an HP finance agreement, the car will be yours to keep or sell on. There’ll be no large optional final payment if you want to keep it – as is the case with PCP finance – nor will you need to return it to a dealer. Before you make the final payment, however, the car is still property of the finance company meaning you can’t sell it on without their permission.

What if I want to change my car before the end of the agreement?

You can pay to end a finance agreement early by covering the cost of any unpaid monthly instalments and any interest you owe in a single lump sum, called a settlement fee. Some dealerships will offer to pay off your outstanding finance – up to the value of your car – if you choose to trade it in for a new model.

For example, if your car’s worth £10,000 and the settlement fee’s £2,000, a dealer could offer to pay the fee and put £8,000 towards a new model. If, however, the car’s worth £5,000 and you’ve still got £6,000 of monthly instalments to pay off, a dealership may only offer you £5,000 – you’ll have to pay the rest of the settlement yourself. This situation is called being in ‘negative equity’ – it’s not particularly common but can happen if your car suffers from particularly steep depreciation.

Do I have to take the dealer’s finance?

You’re are not obliged to accept a dealer’s finance offer – you may find outside lenders offer more competitive interest rates. As will all forms of personal finance, however, it pays to do your homework – shop around and make sure you’re getting the best deal before you sign on the dotted line.