When it comes to choosing the car finance agreement that’s right for you, there are a number of types of finance to consider. Hire purchase is a popular way to finance a car in the UK. There are so many benefits of taking out a hire purchase deal and as always, there are drawbacks too. Car finance can’t be guaranteed to every person who applies for it but if you’re interested in taking out a HP car loan, the guide below looks at who they’re suitable for and the pros and cons.
What is Hire purchase?
Hire purchase car finance is a simple and easy-to-understand way to get a car. It’s a form of secured loan which means the loan is against an asset, and in this instance, it’s a car. You can choose to spread the cost over 3-5 years and you will usually need to put down a deposit at the start of the agreement. However, there are also options to finance a car on HP with no deposit to pay too. The amount you put down as a deposit can help to lower your loan amount and make your monthly payments smaller so larger deposits can be beneficial. The finance lender owns the car throughout the agreement until the deal has ended. You can take ownership of the car at the end of the deal by paying the option to purchase fee.
Why should you consider Hire Purchase for a car?
There are different finance deals to choose from but hire purchase is one of the most popular and below are the top reasons why its loved by drivers.
1. It’s simple to obtain and understand.
Hire purchase is one of the most straightforward forms of finance to understand. Your loan is split into equal monthly payments till the end of the agreed term with interest included in the payments. There’s not as many restrictions as there is with other forms of finance too. Hire purchase can be easy to obtain and to sorting a car finance deal can be done in a matter of days.
2. Fixed payments and interest rates.
Throughout the finance term, you will benefit from fixed payments and fixed interest rates which means you will know exactly what you are paying each month, and it will not change. At the start of the deal, you can use a payment calculator for hire purchase to see how much you could be paying a month and how much you could borrow. You will need to meet each and every payment till the end of the term so it’s important you can afford the monthly amount.
3. Hire Purchase can be bad credit friendly.
Hire purchase is a form of secured loan which means the lender owns the car during the agreement. It could be offered to suitable bad credit applicants because the lender can take the car from you if you fail to stick to the rules of the agreement and don’t pay.
4. You get to own the car at the end of the deal.
Once your deal has ended, you’ve made all your payments in full and paid the option to purchase fee, the ownership of the car transfers from the lender to you. There are then no more payments to make, the deal has ended, and the car is yours to keep. Usually, the final option to purchase fee is similar to what you’ve been paying a month and isn’t a large balloon payment like you find in PCP deals.
5. There are no mileage restrictions.
In PCP deals, most drivers get finance with the intention of handing the car back and the lender needs to evaluate how much the car will be worth at the end of the deal and therefore need to set an agreed annual milage. Exceeding the mileage at the end of the deal or handing the car back in a damaged condition, can cost you. In hire purchase deals, there are no mileage or damages charges to pay, and you can use the car as often as you wish.
Are there any disadvantages of hire purchase deals?
It wouldn’t be fair to only look at the positives of hire purchase without discussing why it may not be suitable for your situation.
- The lender owns the car throughout the agreement. If you want to own the car from the start of your loan, hire purchase can’t provide this as it’s a form of secured loan. Unsecured loans such as personal loans can help you buy the car outright and pay for it over an agreed term.
- Higher interest for bad credit applicants. While hire purchase could be suitable for drivers with bad credit, it can mean higher interest rates. It can be much more cost-effective to improve your credit score, remove any negative markers, and get a better rate rather than jumping at the first bad credit finance deal offered.
- Not as practical for short-term loans. If you’re looking to take out short-term loan for a car such as a one-year agreement, it may not be possible with hire purchase and deals usually work best over 3-5 years.
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