Explanation of Hire Purchase
Hire purchase is a loan. You agree to pay an initial deposit and then pay off the balance in monthly instalments over a set period of time. At the end of this period, the car is yours.
- This is the most common form of loan offered by banks and financial institutions and although the interest rate you pay is of importance it is secondary to the cost of the vehicle.
- There is little point in saving 1% in interest which amounts to £500 on an average car over a three year term when you end up paying £1000 more than you should for the car.
- A consumer does not have legal title to the goods until the final monthly repayment has been made.
- A hire purchase agreement is another form of personal debt. The lender buys the vehicle and allows you to use it while you make payments. Only when all payments are complete is the car officially yours.
Advantages and Disadvantages.
The main advantage of a hire purchase agreement is that you can purchase something you couldn’t otherwise afford.
If you do not keep up the payments the lender will have the right to repossess the vehicle. Usually this will apply if you have paid less than a third of the agreement. If you have paid more it is usually necessary for the bank to take you to court to either reclaim the vehicle or the outstanding finance. In many cases for a consumer this is a safer form of finance than a regular secured loan.
Interest rates can be determined by your credit rating. Most consumers use the APR as a guideline although the monthly payment is really the most important part of the cost. APR can be manipulated by large deposits and changing the capital cost which is why you sometimes see 0% finance deals.
Reselling the vehicle during the hire purchase term can be difficult. Strictly speaking you need to settle the finance so that, upon sale, you can transfer clear title to the new owner.