How hire purchase works

Car dealership

Hire purchase is a popular form of car finance because you own the car at the end of the contract

Hire purchase agreements can be quite complicated but, put simply, you hire the car from a finance company until you make your final payment, which includes a 'option to purchase' fee. After you have paid this, you own the car.

How much can I borrow?

You can borrow nearly the full value of the car. Typically there's a 10 per cent deposit payable at the start of the agreement.

How much will I pay?

You pay off the entire value of the car in monthly instalments following the payment of an initial, one-off deposit of around 10%. The loan term can be as long as five years.

What do I get?

You're getting access to the car. The most important thing to understand is that it's not your car until you've made the final payment. Having said that, you don't have the limited mileage you get with contract hire loans.

What happens if I stop paying?

If you're more than halfway through the loan period (i.e. you've paid off more than half the cost of the car), then you can stop paying and the car will go back to the lender.

Drivers sometimes do this when they could get the equivalent car for a lower cost than they would by making the remaining payments. The car should be in good condition, so you might also have to pay for any outstanding repair work that needs doing.

If you're not yet halfway through the payments then you will need to pay whatever will take you to half the amount you've borrowed, before you can get out of the agreement.

If you've paid off more than a third but less than half then the lender needs a court order to take the car back, unless you agree to the repossession.

Can I pay it off early?

The lender has the right to charge a fee on top of your remaining debt, but this is controlled by law.

If you have less than £8,000 to pay, then you won't pay any other extra fees.

If you still owe more than £8,000 than it will be whatever's lowest of: a) 1 per cent of the remaining debt, b) 0.5 per cent of the debt if there are fewer than 12 months left on the contract or c) the interest portion of the money that you owe.

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