- How is Hire Purchase calculated?
- What is a deposit contribution?
- How does APR affect Hire Purchase price?
- How do I work out my monthly HP payments?
When you’re looking for a new car and considering the different finance agreements available it’s important to know how the price of each is calculated. This is so that you are able to make an informed decision as to which finance agreement is right for you. It will also give you complete transparency, as you should always know what you’re paying for.
We think this is a really important aspect of your journey as a buyer, and it’s vital that you fully understand where your money is going.
In this article, we’ll look at how the cost of a Hire Purchase agreement is calculated, and the sort of things that can affect it.
How is Hire Purchase calculated?
As a finance agreement, Hire Purchase, often referred to as HP, is calculated differently to a lease contract (such as Contract Hire).
At the beginning of a Hire Purchase, you will agree to put down a deposit. This can be as much or as little as you want. You will also get the option of a balloon payment. This is a larger payment at the end of your contract that will clear off the remaining finance. As a general rule, the price of a Hire Purchase is calculated as follows:
- Calculate the interest on the amount you are borrowing
- Divide the interest by the total number of payments you will be making
With a lease agreement such as Contract Hire, there tend to be considerably more discounts available to customers than there are for a finance agreement such as a Hire Purchase. At OSV we have access to fleet discounts that aren’t usually available to private individuals, which will enable you to get a better price on your Hire Purchase agreement. There is also a chance that the manufacturer will offer a deposit contribution.
What is a deposit contribution?
A deposit contribution is pretty self-explanatory; it’s where the manufacturer contributes to the deposit. So, say you put down £1000 on a car, the manufacturer may contribute £4,000 totalling a £5,000 deposit at the start of your contract. While it doesn’t seem like a discount, it actually is. However, the full cost of the car is written on the finance agreement, unlike a contract hire where the full amount isn’t stated. And, manufacturers aren’t keen on revealing the level of discount on a car. So instead, they will apply deposit contributions to make up for that fact.
A deposit contribution can vary between manufacturers. If you’re looking at a Mini, then you may only get a deposit contribution of 3%. Other manufacturers, however, may offer you between 10-12%, or possibly higher.
When you’re looking at how Hire Purchase costs are calculated you also need to look at the APR.
How does APR affect Hire Purchase price?
With a Hire Purchase, the APR can change depending on your credit score. If you have a perfect or near-perfect credit score, then you will probably get the ‘typical APR’. Around 51% of people get typical APR, which means that you have a 1 in 2 chance of qualifying for typical APR.
Anyway, if you have a less than perfect credit score, then the APR will increase because you are seen as a slightly greater risk.
This is not something seen as part of a Contract Purchase or Contract Hire agreement, however, it is something that can occur on Hire Purchase.
The more you borrow and the longer the term, the more interest you will pay. Though it’s not straight forward to work out the interest rate you will pay (the APR) you can work out your monthly payments if you know the flat rate. Normally, on a new car (if you have a great credit score), the flat rate would be between 2.5% and 4%. Of course, if you have a credit score that isn’t quite perfect then the flat rate will be slightly higher. If you have a less than perfect credit score, then the flat rate might be closer to something between 5% and 8%. If your credit score is poor, then the flat rate will, again, be higher.*
How do I work out my monthly Hire Purchase payments?
Below we have outlined a guide for you to use in order to work out your monthly Hire Purchase payments using a flat rate (in this case a flat rate of 3%):
- Flat rate (3%) multiplied by Length of term (4 years)
- 3 × 4 = 12%
- Take the amount you want to borrow (e.g. £20,000), multiply that number by the flat rate you just calculated (e.g. 12), then multiply that by 0.01
- 20,000 x 12 x 0.01 = £2,400
- Add the 12% (e.g. £2,400) to the amount you want to borrow (e.g. £20,000) and you will get the total amount you will be borrowing
- 2,400 + 20,000 = £22,400
- Work out the number of months in the agreement (number of years x 12)
- 4 (years) x 12 (month) = 48 months
- Divide the total amount payable across the agreement by the number of months
- £22,400 ÷ 48 = £466.67
- Therefore your total monthly payments will be £466.67
The above is an example only. If you would like more information about Hire Purchase please contact our Vehicle Specialists on 01903 538835 or request a free consultation and they will be able to help you tailor an agreement to your requirements.
There are some exceptions, such as if you’re borrowing a smaller amount of money. If you borrow less than £7,000 the interest rate will be higher as it’s not worth the funder lending the money.
It’s also worth keeping in mind that Interest rates normally increase on a Hire Purchase if the repayment term is over four years.
So that’s how a Hire Purchase is calculated.
As it’s a finance agreement, there is less that can affect the cost of a Hire Purchase in comparison with a lease agreement. Overall, this is due to the fact you own the vehicle at the end of the agreement, so you don’t have to worry about mileage or general wear and tear, etc. However, it’s important that you are aware of how the price is calculated and the sort of things that can have an effect on what you pay.