Hire purchase (HP) is a type of credit, often available from car dealers. It can offer you the convenience of being able to sort out your finance and pick your car in the same place. Under a HP agreement, you hire the car, pay an agreed amount usually in monthly repayments, and become the legal owner of the car at the end of the agreement. The legal owner of the car is the finance company that gave you the money to buy the car and you cannot sell the car without the finance company’s permission.
- How does HP work?
- Interest and how it is charged
- Fees and charges
- Can you cancel your HP before you finish your monthly repayments?
- What is voluntary surrender?
- Comparing a hire purchase agreement with a personal loan
- Hire purchase and your credit record
- Security tip
- What happens if your car is faulty?
Many ‘car finance loans’ offered by dealers and some lenders are actually HP agreements. The dealer acts as an agent for a finance company and earns commission to arrange the HP for you. In this case, the dealer is acting as a credit intermediary and must be authorised by the CCPC. You can check if they are authorised on our register of Credit Intermediaries.
When you use a HP agreement to buy a car, the car dealer sells the car to the finance company. The finance company then rents the car to you for an agreed period of time usually for a set monthly repayment over a number of years. However, some HP agreements will have a balloon payment at the end of the agreement which is normally higher than your usual monthly repayments.
During the agreement, you can use the car but the finance company actually owns it. They are the owner, and you are the hirer. The finance company may be able to repossess (take back) the car if you fall behind with your payments. At the end of the agreement, the finance company passes ownership of the car to you, provided you have made all the repayments.
|You are the registered owner of the car for tax and insurance purposes even though you are not the legal owner of the car|
The total amount you pay back to the finance company is called the total HP price. It is made up of:
- the cash price of the vehicle, plus
- interest, plus
- fees to set up and end the agreement
The interest rate on HP agreements varies depending on the finance company. Interest is calculated at a fixed rate on the total amount you borrow for each year of the agreement. Given that the interest rate is fixed for the term of the agreement, you cannot usually increase your repayments each month if you wish to do so. If you want to extend the term, you may be charged a rescheduling fee.
If you pay off your agreement early and keep the car, you may be entitled to a discount on the interest you have to pay. This is known as an ‘interest rebate’. But, if you pay off the agreement early, you will not save as much in interest as you might with other types of credit. This is because with a HP agreement it is up to the finance company to decide what interest rebate they will give you.
When comparing your options, make sure you compare the total amount payable on a personal loan (cost of credit) with the total HP price (the original amount of finance, plus interest and fees). Use our personal loan cost comparisons to help you.
You are entitled to a list of all additional charges and fees, so ask the dealer for this before you sign any agreement.
|TYPE OF FEE||REASON FOR FEE|
|Documentation fee||This is a fee for setting up the agreement. It can vary between €50 to €100.|
|Interest surcharge for missed repayments||A higher rate of interest may be charged on any repayments you missed.|
|Penalty fee for missed repayments||This is charged for missed or late repayments, in addition to the interest surcharge. It is usually about €25.|
|Completion fee||This is a fee to end the agreement and to allow ownership of the goods to pass to you. It can vary between €50 and €75.|
|Repossession charge||If the finance company repossesses the car, you will be charged a fee, usually around €300.|
|Rescheduling charge||If your finance company agrees to change the terms of the agreement, you may be charged about €60-€70|
With a HP you can end your agreement at any time and give back the car. To do this you will need to pay half the price (if you haven’t done so already) – this is called the ‘half rule’.
The half rule is part of the Consumer Credit Act 1995 and gives you the right to end a HP agreement at any time. The half rule limits your liability (the amount you are responsible for) to half the HP price of the car. The agreement from the finance company must show you the figure for half the HP price of the car.
If you have paid less than half of the HP price of the car, you can end your agreement and give the car back, and you will only owe the difference between what you have paid and half of the HP price of the car. You don’t have to pay half the HP price to the finance company before you end the agreement under the half rule. However, you will have to pay the difference between what you have paid to date and half the HP price. You will also be responsible for the cost of any repairs that are necessary.
If you have paid more than half of the HP price of the car and have not missed any payments, you can end the agreement and hand back the car. You will be responsible for the cost of any repairs that are necessary. If you have paid more than half of the HP price, you will not be entitled to any refund.
|Be careful what forms you sign from the finance company. In particular do not sign a voluntary surrender form.|
For examples of how the half rule works, take a look at our booklet on ending a hire purchase agreement.
If you’re having trouble making repayments on your HP agreement you can take a look at your options here.
Voluntary surrender is an arrangement whereby you give the car back to the finance company but you will still be liable for the outstanding debt – your debt does not disappear with the car. When you sign a voluntary surrender form, the finance company sells the car and the money they get from the sale will go towards the amount you owe.
Depending on how much you still owe the finance company, and how much they get from the sale, you could end up owing far more money with voluntary surrender than the half rule.
The example below explains the possible difference in your repayments depending on whether you hand the car back using the half rule or sign a voluntary surrender.
|Handing back the car under the Half Rule||Signing a Voluntary Surrender form
|Total HP/PCP price||€20,000||€20,000|
|Half the HP/PCP price||€10,000||€10,000|
|Amount paid to date||€ 9,000||€ 9,000|
|Amount received from sale of car||N/A||€6,000|
|Balance you will owe:||€1,000 as you only have to pay up to the half price||€5,000 as you are liable for the full outstanding debt|
The main difference between using a personal loan and a HP agreement to buy a car is that with a personal loan you borrow money, pay for your car and own it immediately. With a HP agreement, you don’t own the car until you make the last repayment.
|If you get into problems with repaying your HP agreement you cannot sell the car to help with the repayments, without the finance company’s permission to do so.|
If you want to compare the cost of a HP agreement with the cost of a loan, you cannot compare them by using the APR. This is because a hire purchase agreement does not have to show APR as a loan does. Instead you can
- compare the total amount of interest and costs you have to pay back
- make sure to include any additional charges when comparing the cost of the loan with the cost of a HP agreement
As with other types of credit, when you take out a HP agreement, your finance company will send details of the repayments you make to a credit reference agency. Find out more about what information is shown in your credit history.
|Top Tip – BE AWARE|
|If you agree to act as a guarantor for someone taking out a HP agreement you are in fact a joint hirer and not just a guarantor. Any missed repayments will also show up on your credit record. As a result of this you may find it difficult to get a loan in the future.|
If you are thinking of buying a second hand car always check that the car is not under any existing finance agreement first. If it is, the person trying to sell the car does not actually own it and may not have the right to sell it to you. There are companies that keep records of cars subject to HP agreements. You will be charged a small fee for this service. Find out more about what checks you should do before buying a car.
When you buy goods, including cars, they should be of merchantable quality – that is, fit for purpose. If you buy a car on HP and realise it’s faulty, you should return to the dealer you bought the car from and ask them to fix it. If the dealer refuses to fix it or tries to charge you, you should contact the finance company who you are making your monthly repayments to – as they are the legal owners of the car.
As the legal owners, the finance company has a responsibility to help you get the issue resolved. If the finance company will not help you resolve the issue you can go through their complaints process and if necessary escalate it to the Financial Services and Pensions Ombudsman.