Hire purchase (HP) is a car finance agreement where you pay a deposit and then fixed monthly payments until you’ve paid off the car’s full price plus interest. Once the last payment is made, the car is yours. This guide covers how HP works, its pros and cons, how it compares with PCP, and the rights you have under a regulated HP agreement.
In short
With hire purchase, you pay a deposit and then equal monthly payments covering the whole cost of the car plus interest. The lender owns the car until your final payment, after which ownership passes to you. There’s no mileage limit and no large payment at the end.
What is hire purchase (HP) car finance?
HP is one of the simplest forms of car finance. The lender buys the car from the dealer and “hires” it to you while you pay for it. The amount you borrow is the car’s price minus your deposit, and that amount, plus interest, is split into equal monthly payments over a fixed term.
Because the car belongs to the lender during the agreement, the lender has security for the loan. You look after it, insure it and keep it taxed, but you can’t sell it, scrap it or make major modifications without the lender’s permission.
How HP works step by step
- Agree the price. You choose the car and agree the cash price with the dealer.
- Pay a deposit. This might be cash, the value of a part-exchange car, or both. Some lenders don’t require one.
- Choose a term. Most HP agreements run for between 24 and 60 months.
- Make fixed monthly payments. Each payment covers part of the amount borrowed plus interest. The payment stays the same for the whole term.
- Pay any option to purchase fee. Many agreements include a small fee, often added to the first or last payment, to transfer ownership.
- The car becomes yours. After the final payment, legal ownership passes to you and the agreement ends.
Worked example
A car costs £20,000. You pay a £2,000 deposit and borrow £18,000 over 36 months at an illustrative APR of 10.9%. Your monthly payment would be about £584.12, and the total you’d pay, including the deposit, would be about £23,028. These figures ignore fees and are not a quote.
Pros and cons of HP
| Pros | Cons |
|---|---|
| You own the car at the end, with no large final payment | Monthly payments are higher than PCP for the same car |
| No annual mileage limit | You don’t own the car until the final payment |
| Usually less interest overall than PCP, because you clear the balance as you go | Cars lose value, so you may owe more than the car is worth early on |
| Fixed payments make budgeting predictable | Missing payments can lead to the car being taken back |
HP vs PCP: what’s the difference?
| HP | PCP | |
|---|---|---|
| Monthly payments | Higher | Lower |
| Final payment | None (or a small fee) | Large, optional final payment |
| Ownership at the end | Automatic | Only if you pay the final payment |
| Mileage limit | None | Yes, with charges for excess miles |
| Best suited to | Keeping the car long-term | Changing cars every few years |
Using the same £20,000 car, deposit, term and illustrative rate, a PCP with a £8,000 final payment would cost about £393.78 a month. That’s around £190 a month less than HP. But if you then paid the final payment to keep the car, the total would be about £24,176, roughly £1,150 more than HP, because you’d have paid interest on the deferred amount throughout.
Your rights on an HP agreement
If your HP agreement is regulated under the Consumer Credit Act 1974, as most personal car finance is, you have some important rights:
- Early settlement. You can pay off the agreement early at any time. You’ll usually get a rebate on future interest, though a small charge may apply. See settling car finance early.
- Voluntary termination. Once you’ve paid half of the total amount payable, you can end the agreement and hand the car back, as long as it’s in reasonable condition allowing for normal wear and tear. See voluntary termination.
- Protection from repossession. Once you’ve paid at least a third of the total amount payable, the lender generally needs a court order to take the car back if you fall behind, unless you agree to return it.
- A right to complain. If you’re unhappy with how a lender treats you, you can complain to it and then, if needed, to the Financial Ombudsman Service.
These rights apply to regulated agreements. Check your paperwork, which should say whether your agreement is regulated by the Consumer Credit Act.
Is HP right for you?
HP may suit you if you want to own the car outright, plan to keep it for several years after the agreement ends, or drive more miles than a PCP limit would allow. It may suit you less if the monthly payments would stretch your budget, or if you prefer to change cars regularly. If you’re not sure, compare the total amount payable on HP and PCP quotes for the same car.
HP car finance FAQs
Can I sell a car on HP?
Not until the finance is settled, because the lender owns the car. You can ask the lender for a settlement figure, pay it off, then sell the car. A dealer can also settle the finance for you if you part-exchange.
Is there a mileage limit on HP?
No. Unlike PCP, HP doesn’t set an annual mileage limit, because you’re paying for the whole car rather than its value at a future date. High mileage will still reduce the car’s resale value.
What happens if I miss an HP payment?
The lender may charge a fee and report the missed payment to credit reference agencies, which can harm your credit score. If you keep missing payments, the lender can end the agreement and take the car back. Contact the lender early if you’re struggling, and get free help from MoneyHelper or StepChange.
When do I own the car on HP?
After you’ve made the final monthly payment and paid any option to purchase fee. The lender should then confirm the agreement has ended and remove its interest in the car.