- Hire purchase (HP) is essentially where you pay a fixed monthly payment for a certain period of time.
- Once that time is up, you own the car.
- The difference between a hire purchase and a lease agreement such as a contract hire, for example, is that you pay the monthlies with the outright intention of owning the car.
- Essentially, it’s a loan that you are paying back, rather than renting the car.
What is hire purchase?
In this article, we look at what hire purchase is, its pros and cons, and whether hire purchase is right for you.
What are the advantages of hire purchase?
Some of the advantages of this option are;
- You will own the vehicle outright
- There are many that like the idea of owning their car.
- It’s a fixed rate loan
- This means it will remain unaffected by fluctuating interest rates.
- The interest rate tends to be low
- Speaking of interest. This is because you’re 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 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 cash to pay the finance off.
What are the disadvantages to hire purchase?
But there are disadvantages to HP. These 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 a big as a discount on a HP than you would on a lease agreement.
How is the price of a hire purchase calculated?
The cost of the monthly payments on this agreement are calculated as follows;
- You need to find out what the “flat rate” is
- Multiply this by the years you want to borrow the money for (up to five years)
- Take this amount and times it by the amount you want to borrow
- Then divide this by how many months you are paying the monthly payments
This will give you an idea of how much your hire purchase will cost. It won’t, however, give you an APR.
Who is hire purchase for?
What else should I consider when looking at a hire purchase?
Before you decide whether you want to go for a HP. For example;
- 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 are paying for your car and you are using it for personal use, including driving 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
- Are a member of a limited liability partnership (LLP)
- Are the proprietor of your own business
If you are the director of a limited company then, unfortunately, you still have to pay for 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 want more information on company car tax then you can read our article here.
What is GAP insurance?
Guaranteed Asset Protection insurance is something that may be offered to you when you go for a hire purchase
GAP insurance will cover the difference between what your insurance company pays out and what the finance company will want in the event you write off your car. If you choose to purchase GAP insurance then you eliminate the risk of ending up in a negative equity situation. For more information on GAP insurance you can read our article here.
Hopefully this has cleared a few things up about hire purchase. It’s not a lease in a traditional sense in the way that you go into the contract with the intention of owning the car at the end. While it’s more expensive monthly than a contract hire, the interest rates tend to be lower. You do, however, have to think about GAP insurance and company car tax.
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