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Hire Purchase

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What is it?

Hire purchase (HP) is similar to a loan, except the goods purchased do not belong to you until the loan is fully repaid. This means you could lose the goods if you don't keep up repayments under the hire purchase agreement and you cannot sell or modify the goods until the debt is paid off.

You'll normally pay a deposit, followed by monthly instalments and then a final nominal payment after which you own the goods.

Hire purchase is most common when buying cars (where it's often called lease purchase), although is often available when buying expensive items such as furniture and computers.


What costs can I expect?

Very similar to loans. As well as interest, you may be charged an arrangement fee and/or face early repayment penalties.


Can I end it early?

If your HP agreement is under £25,000 you can cancel it at any time time, provided you:

  • Return the goods to the lender.
  • Make good any missed payments and bring your total payments up to half the total amount payable on the agreement (you won't get a refund if you've paid more).
  • Cover the cost of any damage to the goods.

You should also have the option of repaying the loan in full early, but the lender will likely charge penalties for doing so. These vary widely so check with your lender.


What happens if the lender ends the agreement?

If you fall behind on payments then the lender can repossess the goods. However, if you've paid a third or more of the total payable (including any deposit etc.) then the lender will need to obtain a court order before they can take the goods, unless you give your consent.

Once the goods have been retuned the lender will then try and reclaim any unpaid balance, usually calculated as the total amount payable less the amount already paid and the value of the goods repossessed.


Personal Contract Plans (PCPs)

PCPs have become an increasing common alternative to hire purchase when buying cars, primarily because the monthly payments are usually lower (though that doesn't always mean the overall cost is less!).

Under a PCP contract you pay a deposit followed by a monthly amount for a fixed period (usually one to four years) to use the car, after which you can pay a final amount (called a 'balloon' payment or 'guaranteed minimum future value') to keep the car or give it back to the finance company. PCPs also have a fixed annual mileage, e.g. 10,000, charging you a penalty per mile if you exceed this.

The monthly payments are lower than hire purchase because you're not making any repayments towards the 'balloon' payment at the end. However, you will still pay interest on this final payment throughout the contract term, regardless of whether you decide to make that payment or hand the car back.

The main advantage of PCPs over hire purchase or personal loans is that if the car is worth less than the balloon payment at the end of the term then you can simply give it back. With loans and hire purchase you're locked into buying the car and could owe more than the car's worth if depreciation is severe.

The APR on PCP contracts tends to be higher than hire purchase and personal loans, but rates vary widely so it's always worth comparing before you buy.

Are PCPs worth it? Provided you get a good interest rate deal then they can be more attractive than hire purchase or a loan. However, if the interest rate is too high it can prove a more expensive option overall.


Beware 'flat' interest

Some car dealers quote the 'flat' rate of interest and not APR, trying to give the illusion you're getting a better deal than you really are. The flat rate means interest is charged throughout on the original sum borrowed, not the actual balance outstanding each month. As a rough rule of thumb, double the flat rate and you'll get an equivalent APR.


Beware 'buy now pay later'

Some retailers offer 'buy now pay later' schemes, often with '0%' interest. You'll usually pay a 5% - 10% deposit when you take the goods and then pay the full balance on or before an agreed future date (e.g. 12 months). Provided there's no fee or interest and you'll have enough money to pay the full amount by the deadline, then these can be worthwhile (albeit hassle as you'll have to complete the finance company's application form).

However, be very careful. Most are simply hire purchase agreements with a deferred payment start date. This means if you can't pay back the money in full by the agreed date you'll automatically enter into a hire purchase agreement which could last several years and charge a sky high rate of interest (APRs of 30% + are not uncommon). If this happens the interest will also probably be backdated to when the agreement started, i.e. when you originally signed the paperwork and took the goods.

Candid Example Mr Vulnerable buys a cool plasma TV for £500 on a 0% buy now pay later deal. He puts down a £50 deposit with £450 to pay in six months time, however the finance agreement also says that if the balance isn't repaid by then he'll have to make 43 monthly payments of £18.03.
When the six months are up Mr A can't afford to repay the £450, so starts making the monthly payments instead. His total repayments for the £500 TV will be £827, nearly 30% APR.

Remember, if you don't pay the balance by the due date (and not a day over), your 0% offer could suddenly turn into a total rip-off.


What 'extras' will the salesman push?

Whenever you buy by hire purchase or PCP there's a good chance the salesman will try try and push the following products to boost their commission.

Payment Protection Insurance (PPI)Guaranteed Asset Protection (GAP) Insurance

The same arguments as loan PPI hold true for HP / PCP PPI. See here for more details.


How much commission do they pay?

If you buy a PPI or GAP insurance through a salesman or other third party they will normally receive a commission from the insurer for the sale. This is usually built into the premiums meaning you could pay a lot more compared to going direct to an insurer.

As PPI is mostly sold through internal salesforces it's difficult to establish the typical commission rate. However, compare an expensive quote to cheaper one direct from an insurer and commission will probably account for much of the difference.

Typical commission
Product Type Initial Commission Ongoing Annual Commission
GAP Insurance Around 50% None

To find out more about commissions and how they work, read the Candid Money Guide to financial advice here.


Jargon

Here's some of the more common hire purchase jargon you might come across:

JargonMeaning
Flat InterestAn interest rate that is charged on the original sum borrowed throughout the term. To get a rough estimate of the APR, double the figure.
GAP InsuranceGuaranteed asset protection insurance is designed to make up any shortfall between what's owed on hire purchase and a car insurer's payout if your car is written off or stolen.
Hire PurchaseSimilar to a loan, except the goods purchased do not belong to you until the loan is fully repaid.
Lease PurchaseAnother name for hire purchase, usually applied to car policies.
PCPsPersonal contract plans, a type of hire purchase where you must pay a large final payment to keep the goods (e.g. car) else hand it back to the finance company.