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What is hire purchase (HP) car finance?

What is hire purchase (HP) and how does it work? Here’s everything you need to know about this type of car finance.

By Verity Hogan

Published: 12 October 2023

Hire purchase (HP) is a popular form of car finance that lets you spread the cost of your new or used car over a series of monthly repayments. 

HP car finance could be a good choice for you if you know you want to own the car at the end of your finance agreement and an annual mileage limit doesn’t suit your needs. Here we look at how HP finance works and its key advantages and disadvantages.

What is HP finance?

HP finance is a car finance agreement where you pay an initial deposit followed by fixed monthly payments to a car finance company over the length of the contract. At the end of the contract you usually need to pay a small option-to-purchase [OTP] fee and then you become the legal owner of the car. 

Your monthly payments will cover the cost of the car, including interest. As with a personal contract purchase (PCP) agreement, the HP deposit is an upfront payment that forms part of the overall cost and dictates what your monthly repayments will be. The larger the deposit, the lower your payments will be each month.

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How does a hire purchase car finance agreement work? 

A hire purchase car finance agreement is made between you and a finance company. You usually need to put down a deposit, which is a part-payment towards the overall cost rather than a refundable deposit of the kind you pay if you rent an item or a property. If you don’t already have a deposit saved up, some companies do offer no-deposit options. 

The outstanding amount covers the car’s purchase price plus interest. Depending on the exact terms of your agreement, the loan term could last anywhere from one to five years, and you’ll make a fixed monthly repayment throughout. 

It’s worth keeping in mind that while a longer loan term will often reduce your monthly payments, you might end up paying more overall because you’re paying interest for a longer period.

Your exact monthly repayment amount will be based on your individual circumstances as well as factors including: 

  • The size of your deposit  

  • The length of your loan 

  • The interest rate (APR)

  • The car you choose

What is APR in an HP agreement? 

APR is short for annual percentage rate and is part of the total annual cost of borrowing during an HP agreement. 

Also known as the interest rate, your APR is the percentage of your loan that a lender will charge you in return for lending you money. 

The APR offered for your HP agreement will depend on several factors including the lender that approves your application, your credit score, and your individual circumstances.

Do you own the car with HP finance?

During your HP agreement, you’ll be the car’s registered keeper but not its legal owner. This means you’ll be responsible for its day-to-day upkeep, including car tax, MOT and servicing, but you won’t be able to sell or modify the car. 

There’s usually a small option-to-purchase (OTP) fee to pay at the end of your HP agreement. It’s often as little as £10 but in some cases it can be more. 

If you’ve kept up with your repayments, you’ll become the car’s owner as soon as the agreement ends and you’ve paid any OTP fee. You’ll then be completely free to sell it, part-exchange it or even add go-faster stripes and a new set of alloys if that’s your thing!

What do you need to qualify for HP finance? 

To qualify for HP finance, you’ll typically need to supply a few personal details and supporting documents. You’ll also undergo a soft credit check (more on this below) and an affordability check to assess your eligibility. In the UK, you must also be over 18 to get any type of car finance.

The details required will depend on the lender assessing your application, but they’ll probably ask for:

  • Your full name

  • Your date of birth 

  • Your current address

  • Your employment details, including your job title and salary

Can you get HP finance with no credit checks? 

No. Credit checks are an important part of the HP finance process. They help to ensure that lenders are acting responsibly, offering you a loan that is right for your circumstances. 

There are two types of credit checks when applying for a car loan: 

  • Soft credit check – this allows lenders to assess your eligibility. It won’t be visible to other lenders and shouldn’t affect your credit score.

  • Hard credit check – this goes into more detail and will be marked on your credit report. It will be visible to other lenders for up to 12 months and having too many hard checks in a short time could affect your ability to secure a loan. 

What documents do you need for HP car finance? 

When applying for an HP agreement, you may need to supply several documents to your lender. Each lender has different requirements, but the documentation requested might include:

  • Proof of ID – e.g., a driving licence or passport

  • Proof of address – e.g., a recent utility bill or council tax statement 

  • Proof of income – e.g., three months’ payslips or bank statements

What are the advantages and disadvantages of HP finance? 

There are several advantages and disadvantages of HP finance and there’s no one-size-fits-all; the right deal for you will depend on your personal priorities, your financial situation, the car you want to buy and how you plan to drive it.

Advantages of HP car finance 

  • You’ll own the car at the end of your agreement if you’ve paid the balance and any OTP fee in full

  • You won’t usually have to agree to a mileage limit

  • You won’t need to make a large final payment to own your car

  • It could cost less outright to become the car’s legal owner than with other types of finance such as PCP

Disadvantages of HP car finance

  • Your monthly repayments can be higher than with other car finance options

  • You can’t sell or modify the car during the agreement without permission

  • You won’t own the car until the agreement ends 

How does HP finance compare with PCP finance? 

HP finance isn’t the only type of agreement available. Personal contract purchase (PCP) works in a similar way but generally gives you lower monthly payments because you only pay for part of the car’s value over the length of the contract – if you want to own the car at the end of your PCP agreement you need to pay a lump sum known as a ‘balloon payment’. 

PCP finance is more flexible because it gives you more options at the end of your agreement; you can choose to hand the car back to the lender or use any of what’s called positive equity to roll over into a new loan. 

You can read our detailed guide to the differences between HP and PCP car finance here

How does HP finance compare with a bank loan?

Unlike HP finance, with a bank (or personal) loan you’ll own the car as soon as you’ve used the loan to pay the seller. 

Providing you continue to make payments throughout your loan agreement, you can sell the car, modify it, or trade it in whenever you like. Most personal loans are unsecured’, so they can come with a higher interest rate than HP finance and may require a good credit score. 

How does HP finance compare with leasing a car?

While HP finance eventually leads to car ownership (if you keep up with your repayments), leasing a car (also known as personal contract hire or PCH) is a type of long-term car rental agreement that usually lasts for between two to four years. During the contract, you’ll have to adhere to certain terms and conditions including a mileage restriction.

Does an HP agreement affect your credit score? 

A hire purchase agreement can affect your credit score in different ways depending on how you act as a borrower. 

Your credit score is a three-digit number that represents your current financial situation and your past borrowing behaviour. The higher your score, generally the easier it will be for you to secure a loan. 

If you’re approved for HP finance, your credit score could dip slightly afterwards. This is just because a new loan has been added to your credit profile. As soon as you’re actively making your regular monthly repayments, your credit score will usually start to recover. In fact, if you make all your payments on time, your HP  agreement could even raise your credit score over time. 

By contrast, falling behind on repayments could lower your credit score. The good news is that your credit score is never fixed, so getting your payments back on track and taking other steps to build your score can help offset any damage done.

How can I end an HP agreement?

If you want to end an HP agreement early for whatever reason, there are two main options available: voluntary termination and early settlement. 

You have the right to voluntary termination once you’ve paid 50% of the total amount repayable on your loan, including any interest or charges. If you’ve reached this threshold, you can hand the car back to the lender and walk away. 

To end the agreement early but keep your car, you can contact the lender to request a settlement figure. This’ll usually be the outstanding balance of your loan, minus any future interest. Depending on your situation, you can pay this outright or look to refinance and split the cost into more affordable repayments. Be mindful that some lenders will also charge you a fee for early settlement – check your loan’s terms and conditions to learn more.

How to know if HP finance is right for you

HP finance is one of the most popular types of car finance, but that doesn’t mean it’s right for you. Every individual circumstance is different so it’s well worth weighing up the options available to determine which would work best with your budget, your needs and your driving habits. 

HP could be a good choice for you if: 

  • You want to own your car at the end of the agreement 

  • You plan on keeping the same car for a few years 

  • You don’t want to worry about mileage restrictions

If you’d rather prioritise lower monthly repayments, a newer or higher-spec car, or being able to sell the car whenever you want, an alternative agreement such as a personal contract purchase, personal loan, or leasing might be a better fit. The choice is yours!

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