When looking at different finance agreements, it’s important you know how the price of each is calculated. This will help you make an informed decision as to which finance agreement is right for you, and gives you complete transparency, so you know exactly what you are 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.
So, in this article, we’ll look at how the cost of a hire purchase is calculated, and what sort of things affect it.
How is Hire Purchase calculated?
A hire purchase, as it’s a finance agreement, 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. However, there is 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 £4000 totalling a £5000 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 are looking at a Mini, then you may only get a deposit contribution of 3%. Other manufacturers, however, may offer you 10-12%, possibly higher.
Another thing that you have to consider when you are looking at how a hire purchase is calculated, is 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’. Interestingly, there aren’t actually that many people that qualify for typical APR, so it’s not all that typical. Typically, 51% of people get typical APR. This means that you essentially 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.
I have never seen this with a contract purchase or a contract hire, but it has been done on a hire purchase.
You will pay more interest the more you borrow and the longer the term. However, to work out the interest (this gives you the APR), you will need a programme on your computer that many of us don’t have. You can, however, work out a monthly payment if you know the flat rate. Normally, on a new car with a great credit score, the flat rate (at the time of writing) would be between 2.5% and 4%. If you have a less than perfect credit score, then the flat rate would be between 5% and 8%. If you have a poor credit score then the flat rate can be 9% upwards.
So, for example:
– 3% flat rate x by 4 year term (3×4) = 12
– Take the amount you want to borrow and times by 12%, e.g. £20,000 x 12% = £2,400
– Add the 12% to the amount you want to borrow, e.g. £2,400 + £20,000 = £22,400
– Divide the total by the number of months of the agreement 4 (years) x 12 (months) = 48 months, so £22,400 / 48 = £466.67
– Therefore your total monthly payments = £466.67
There are some exceptions. For example, if you borrow a small amount.
If you borrow less than £7,000, then the interest rate will go up, because 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.
Because it’s a finance agreement, there is less that affects the cost of a hire purchase than affects a lease agreement. This is because you own it at the end, so you don’t have to worry about mileage etc. However, it’s important you know the way in which the price is calculated, and what sort of things affect it.
Andrew has been in the motor trade for over 20 years. What he enjoys most about his job is the team spirit and the dedication of his work colleagues. He also appreciates the teams input in the improvement of the company.
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