Hire purchase is a way to finance buying a new or used car or van. You (usually) pay a deposit and pay off the value of the car in monthly instalments, with the loan secured against the car. This means you don’t own the vehicle until the last payment is made.
How Hire Purchase Works
In most situations, you first need to put down a deposit on the car you want to buy. This is usually 10% or more of the vehicle’s value.
The rest of the value of the car will then be paid off in instalments over a period of 12 to 60 months (one to five years).
Hire purchase is arranged by the car or van dealer, but brokers also offer this service. The rates are often extremely competitive. For second-hand cars and vans the annual percentage rate can vary from 4% - 8% Flat. The lower the number the better. The rate could be higher for example because you don’t have a good credit score.
The loan is secured against the car or van, which is why you can’t own it until you’ve made your last payment, including paying the Option to Purchase fee.
Make sure you understand the terms and conditions of your loan before signing the contract. For example, once all repayments have been made you pay a final fee, known as the ‘Option to Purchase’, once you’ve paid this you’ll own the car or van. This is typically £100-£200, but it does vary so ask how much it will be.
Pros of Hire Purchase
Flexible repayment terms (from one to five years) to help fit in with your monthly budget – but the longer the term the more you’ll pay in interest.
Relatively low deposit required (normally 10% of the car or van price).
Fixed interest rates so you know exactly what you’re paying every month for the length of the term.
Once you’ve paid half the cost of the car, you might be able to return it and not have to make any more payments – find out more about cutting car finance costs.
If you’re credit score is not that high it may be easier to get a hire purchase than an unsecured loan, as the car is used as collateral for the loan.
It does not usually come with milage restrictions. You don’t need to find a large sum to purchase the car like with PCP.
Cons of Hire Purchase
You don’t own the car until you’ve made your final payment, which means if you get into financial difficulties the finance company could take it away.
You can’t sell or modify the car over the contract term without getting permission first.
Monthly payments are usually higher than for PCP and leasing deals.
Your deposit and term length will affect your monthly payments. Your monthly payments are likely to be higher the smaller the deposit is and the shorter the term of the loan.
Until you’ve paid a third of the total amount payable the lender can repossess the car without a court order.
It can be an expensive route if you only want a short-term agreement.
Finance Lease Explained
A finance lease is a method of financing a car or van where they remain the property of the finance company that hires them and the lessee pays for the hire of the asset or assets
The lessor charges a rent as their reward for hiring the asset to the lessee. The lessor retains ownership of the car or van but the lessee gets exclusive use of the asset (subject to meeting the terms of the lease).
A finance lease transfers substantially all of the risks and rewards of ownership of the asset to the lessee. Using a finance lease means that the asset will appear on the lessee’s balance sheet, with outstanding rentals represented as a liability.
Finance leases are either fully amortising (the rentals write the asset down to zero at the end of the term of hire) or to a balloon rental (this may equal the estimated value of the asset at the end of the term of hire).
The balloon rental is a contracted sum that the lessee pays at the end of the term of hire but, of course, the lessee has had the benefit of paying a lower rental during the term itself. Leases with balloon rentals are usually available where the asset has an intrinsic value which will be at least equal to the balloon rental.
At the end of the lease term, the lessee may be offered a lease on the asset for a secondary period at anything between a nominal ‘peppercorn’ rental and a commercial rent.
What are the benefits of a finance lease agreement?
Set regular payments
Minimal cost upfront
Rentals are usually Corporation Tax deductible
Potential to carry on using the asset at the end of the lease period
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