What is Hire Purchase?

When you’re thinking about getting a new car and starting to look at the finance options available, Hire Purchase is one you may want to consider. Hire Purchase, often also commonly referred to as HP, isn’t a lease, it’s a finance agreement.

In this article, we look at what Hire Purchase is, the pros and cons you should consider and whether Hire Purchase is the right agreement for you and your individual requirements.

What is Hire Purchase?

• Essentially it’s an agreement where you pay fixed monthly payments for a certain period of time
• Once the contract period is up you own the car
• The difference between a Hire Purchase and a lease agreement (e.g. Contract Hire) is that you make the monthly payments with the overall intention of owning the car at the end of the agreement
• It’s a loan that you are paying back, rather than renting the car.

What are the advantages of Hire Purchase?

Some of the advantages of choosing Hire Purchase include:

• You’ll own the vehicle outright
  • If you like the idea of owning your vehicle, this is an option to consider
• It’s a fixed-rate loan
  • This means it will remain unaffected by fluctuating interest rates
• The interest rate tends to be low
  • This is because you’ll be taking the vehicle at the end of the contract
• You can reduce monthly costs with the addition of a balloon payment
  • This is a larger sum payable at the end of the contract
• Sometimes, deposits are “optional”
  • Even if it isn’t, you can choose how much you want to pay

• You aren’t restricted by mileage or conditions
• The contract can be ended early if you have the money to pay the finance off.

What are the disadvantages to Hire Purchase?

As with any finance agreement you also need to be aware of the potential disadvantages. For Hire Purchase these disadvantages include:

• Monthly payments tend to be higher than on a lease or Personal Contract Purchase
  • This is because you are paying for the vehicle, not just the depreciation
• Until the final payment is made, the finance house still own the vehicle
  • So you do still have to get fully comprehensive insurance
• In most cases, you don’t get as big of a discount on Hire Purchase as you would on a lease agreement
  • However, at OSV we are able to offer individuals fleet discounts that would usually not be available.

Who is Hire Purchase for?

Hire purchase is ideal for those who want to own their car at the end. If you are unsure as to whether you want to own the car, then you might want to consider other options such as Personal Contract Purchase.

What else should I consider when looking at Hire Purchase?

Before you decide whether you want to choose a Hire Purchase agreement there are some things that you should consider, these include:

• Company car tax
• GAP insurance
• Will the vehicle still be fit for purpose at the end of the agreement
• Can you comfortably afford the payments?
• The insurance costs
• The servicing costs

Will I have to pay Company Car Tax on a Hire Purchase?

If your company is paying for your car and you are using it for personal use, which includes the daily commute to and from work, then yes, you will have to pay Company Car Tax.

You are exempt from Company Car Tax if you are:

• A partner or a partnership
• A member of a limited liability partnership (LLP)
• The owner of your own business

If you are the director of a limited company then, unfortunately, you still have to pay Company Car Tax.

The amount of Company Car Tax you will have to pay is determined by the type of car and the P11d value. The amount you pay a month in tax is calculated by your income and your tax bracket.

If you’d like to find out more information about Company Car Tax, we have written a comprehensive guide for you to refer to.

How is the price of Hire Purchase calculated?

As a finance agreement, Hire Purchase is calculated differently to a lease contract (such as Contract Hire).

In order to give you a clear idea of how the monthly payments and overall cost of a Hire Purchase agreement are calculated we have written a detailed article.

Hopefully, this has answered some of your questions about Hire Purchase. It’s not a lease in the traditional sense in the way that you go into the contract with the intention of owning the car or van at the end. While it’s more expensive monthly than a contract hire, the interest rates tend to be lower. However, you will have to think about things like Company Car Tax, insurance costs and servicing fees.

If you would like to find out more about your individual requirements, please contact our Vehicle Specialists on 01903 538835 or request a free consultation.