There are two main types of vehicle finance. These are Personal Contract Purchase (PCP) agreements and Hire Purchase (HP) deals. While similar in concept – you pay a deposit and then make monthly payments – they do differ in other ways. As you can guess from the name, with a Hire Purchase agreement, you start off essentially hiring a vehicle, and then at the end of the term, and once you’ve made all the agreed repayments, you will have bought it outright.
What is a Hire Purchase Agreement?
A hire purchase agreement is similar to most other types of secured loan, such as a mortgage. Typically, you’d pay an initial deposit, and then make monthly instalments which cover the balance of the loan, as well as any added interest. It’s called a secured loan, as it’s secured against a valuable asset – with a mortgage, this would be your home, while with HP, this would be your vehicle.
A secured loan generally comes with the benefit of lower interest rates, as there is less risk for the lender. However, it’s important to note that if you’re unable to keep up with the due repayments, there is a risk that your assets would be repossessed.
When it comes to different types of vehicle finance, the main difference between hire purchase and PCP agreements is that you’re making payments towards the cost of the vehicle, not the depreciation. This means that when you come to the end of your term, subject to you making all the agreed repayments, you’ll own the vehicle outright.
Do I Need to Make a Deposit?
Did you know that you can get no deposit vehicle finance arrangements? It’s not always easy to save up a lump sum, especially if you require access to a vehicle quickly. Hire purchase deals are included in this bracket – you may not need to pay an initial deposit.
Despite this, it is good to remember that making a deposit could lower your monthly instalments. As a bigger deposit would reduce the amount borrowed, the APR would be calculated using this lower figure, and you’d be paying less interest overall.
Hire Purchase vs Personal Contract Purchase
If you’re unsure whether to opt for a HP or PCP deal, one of the main things to consider is if you wish to own the vehicle at the end of your agreement. If so, hire purchase is probably the better option. PCP would mean you have to make a balloon payment when your term finishes, which could be quite expensive.
It can be useful to weigh up the pros and cons of both types of agreement. We’ve explored the benefits and limitations of hire purchase deals below, to help you get started:
Advantages of HP
- You may not need to make a big deposit when taking out a HP agreement, and might not even have to put down a deposit at all
- When your deal comes to an end, subject to making all the repayments, you’ll own the vehicle outright
- Because a hire purchase agreement is a form of secured loan, they are often more accessible than unsecured personal loans
- With HP, you can spread the cost of repayment
- A hire purchase deal is easy to budget for, as you’ll be paying the same amount each month towards the balance
Disadvantages of HP
- A hire purchase agreement typically comes with higher monthly repayments than a PCP deal
- Due to the fact that HP deals are secured against the vehicle, if you’re unable to keep to the repayments, the vehicle could be repossessed
- While buying a vehicle with a personal loan means you’d own it outright from the start, with HP you wouldn’t technically own the vehicle until you make your final repayment
- If you wish to make any modifications to the car, or sell it, before your agreement ends, you’d need to seek the permission of the finance company
Is Hire Purchase the Right Option For Me?
Once you’ve looked at the advantages and disadvantages of HP, you can determine whether it’s the right choice for you. For instance, if you’re looking for lower monthly payments, hire purchase probably won’t be the best option, and you may consider opting for a PCP deal.
When choosing a suitable vehicle finance option, there are a few other considerations to bear in mind too. These include how many miles you drive each year. Some vehicle finance deals come with a mileage limit, and if you exceed this, you’d be charged. And with some agreements, higher mileage limits mean higher monthly repayments. This applies to PCP deals, as more miles tends to mean a faster depreciation rate, but not HP deals.
Something else to think about is your credit score. If you have a higher credit rating, you’re more likely to be offered better interest rates on your hire purchase arrangement. You may therefore want to see if you’re able to boost your credit score before applying – we’ve outlined a few simple ways to do this in our Bad Credit Vehicle Finance Guide.
Even if you’re not able to massively improve your rating, it could make a big difference! Do bear in mind though that there are car finance options available for people with a poor credit history too – many lenders even specialise in bad credit loans.
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