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What is hire purchase?

Hire purchase (HP) is a way of buying a car – typically brand new – on finance, where you own the vehicle once you make the final payment.

How does hire purchase work?

With hire purchase, you typically need to deposit about 10% of the car’s value. You then pay the remaining cost of the vehicle in monthly instalments, at a set interest rate over an agreed period. Once you’ve made the last payment, you own the car. 

Sometimes, you may need to pay an additional transfer fee at the end of the period. This differs from a car loan, where you buy the car outright and pay back what you owe to the lender.

With HP, the loan is secured against the car. So, if you can’t keep up with the repayments, you could lose the vehicle.

Please note – HSBC doesn’t offer HP, PCP, or leasing agreements.

What’s the difference between HP and PCP?

HP and personal contract purchase (PCP) are both leasing options for financing a car

If you choose HP, you’ll own the car at the end of your finance agreement once you’ve finished making your loan repayments. However, with PCP, you’ll have 3 options: 

  • return the car
  • pay a final balloon payment (the outstanding balance) to own the car
  • trade in the car for a new PCP deal

Can you pay off the hire purchase early?

You can pay off your HP car early, but you must consider certain conditions. For example, there may be an additional fee alongside the outstanding cost of the vehicle to own it. 

The maximum amount you’ll pay includes the car’s outstanding cost (without any interest) and the lowest of these 3 amounts:

  • 1% of the amount repaid early
  • 0.5% of the amount repaid early, if less than 12 months are left of the agreement period
  • the remaining interest on the HP car

So, if you’re paying off an outstanding balance of £10,000, you could also pay upwards of £50 (or 0.5%). There shouldn’t be additional fees if your early repayment amount is less than £8,000.

Can you change your car on hire purchase?

You can’t ‘swap’ your HP car with another on the same finance arrangement. However, you can cancel your HP agreement early and take out another contract with a new vehicle. 

Voluntary termination

If you’ve already paid half of the amount due (including interest), you could possibly return the HP car without further payments. You can then take out a new HP car agreement.  

Sell the vehicle

You can sell the car at a dealership and use the proceeds to pay off the outstanding balance. If the sale price is more than the unpaid balance, you can use it as a deposit on a new HP car. If it’s lower, you’ll need to pay off the balance. 

Hire purchase is one way you can finance your car. If you’d prefer to own the vehicle car outright, saving up or taking out a personal loan may be more suitable.