Hire Purchase - What is it?
Hire purchase is a financing option where you put down a deposit – generally 10% of the car’s value - and pay the rest in monthly installments, for between 1 and 5 years depending on your agreement.
Of course, there is interest attached to hire purchase products, and although rates can be as low as 5% for new cars, they often rise quickly for older models.
Hire purchase or personal loan?
In many ways, hire purchase agreements function much like a personal loan, but there are a couple of very important differences.
Firstly, a hire purchase agreement is just that – you’re simply hiring the car until you’ve fully purchased it. You won’t own the car until all the payments have been made, including an extra £100-£200 ‘option to purchase’ fee at the end of the term. If you fall into financial hardship and are behind on payments, the car can be repossessed.
Additionally, if you opt for a hire purchase agreement, you’re not treated a cash buyer. A loan enables you to negotiate on price – as you’re paying with cash from your own bank account.
Usually only have to raise a low deposit amount
Fixed interest rates and monthly repayments can be spread over up to 5 years
Less risk to the lender as your loan is secured against collateral (the car). May be a good option for those with poor credit
Higher interest and extra fees can make this an expensive way to borrow
You don’t own the car until the end of the hire purchase term – so it can be repossessed if you have difficulties keeping up with payments
As you’re not a cash buyer, you can’t negotiate on price
The real cost of hire purchase
To help you compare the cost of hire purchase against a personal loan, we’ve looked at how much borrowing for a £7,500 car over 4 years would set you back using each option.
||3.5% - Ikano Bank APR Representative
|Option to purchase
|Interest over 4 years
|Total cost of car
(£7,585.92 repaid + £750 deposit & £150 in fees)