What is Hire Purchase (HP)?
Hire Purchase Explained
A Hire Purchase (HP) is actually considered a finance agreement, not a lease in the traditional sense. The main difference between a HP and something like a Contract Hire lease, for example, would be that at the end of the contract you would own the vehicle outright.
In layman’s terms, a HP agreement involves paying fixed monthly payments for between 1 and 5 years. Once the final payment has been made, the vehicle is yours. Think of it more like a loan you’re paying back, rather than renting a car for that time period.
The Pros to a HP
- You will own the vehicle outright at the end of the agreement
- It’s a fixed rate loan which will remain unaffected by fluctuating interest rates
- The interest rate charges tend to be low as you’re taking the vehicle at the end of the contract
- You can reduce monthly costs with the addition of a ‘balloon payment’ (a larger sum at the end of the contract to pay off the rest of the finance)
- Deposit is often “optional” or can be chosen by the customer
- No mileage restrictions
- The finance can be settled early if you have the cash to pay for the final amount (there may be a rebate of the interest, made under the Consumer Credit Act 1974).
Cons to HP
- Monthly payments tend to be higher than on a lease
- The finance house will still technically own the vehicle until the final payment is made
- Insurance needs to be fully comprehensive and until the final purchase is made and you own the vehicle outright, it’ll be slightly more expensive (similar to a lease).
How is a HP price calculated?
Hire Purchase is calculated by taking the full price of the vehicle, deducting any deposit the customer decides they would like to put down and any balloon payment you decide on. The left over cost is then split into the number of months the contract will last for (usually between 12 or 60 months). This will then be your monthly payments.