What are the advantages and disadvantages of a hire purchase agreement?

With the cost of new cars continuing to rise every year, the use of finance to fund car purchases has become increasingly common.

A hire purchase agreement can be a great option if you’re looking to spread the cost of a new or used car, without having to pay the full value up-front. But how does it compare to the other car finance options out there?

In this guide, we’ll dig into the details of hire purchase agreements, their pros and cons and, ultimately, whether hire purchase is worth it for you.

What is a hire purchase agreement?

A hire purchase agreement, also known as a conditional sale agreement, is a form of finance for a new or used car purchase.

After paying an initial deposit, you then make monthly payments to pay-off the value of the car. Once the last payment has been made, the car is yours.

A hire purchase agreement is a form of borrowing, which means that you will accrue interest on-top of the original car value. This means that, at the end of the agreement, you’ll have paid more than the amount first borrowed to pay for the car.

How does a hire purchase agreement work?

The first step in a hire purchase agreement will be to find and contact a suitable lender. There will be a variety of options available, so it helps to shop around and find the best deal for your needs.

Once you have selected a lender, you usually start the hire purchase process by paying an up-front deposit. Based on this deposit and other information provided, the lender will then propose a payment plan for the agreement. The payment plan will set out a monthly payment value and a period of time, often one to five years, over which the value of the car will be repaid.

[Consider inserting graphic to visualise the hire purchase timeline/process]

The larger the deposit you make, the lower the resulting monthly payments will be. A typical deposit for a hire purchase agreement might be around 10% of the car’s value.

You will then enter a contract through which you will need to make the agreed monthly payments, sticking to the agreed schedule.

It’s important to keep in mind that, as a form of borrowing, the hire purchase agreement will include interest on top of the value of the car. This will already be factored into your monthly repayments as part of the original agreement, but it’s a good idea to be aware of how much you’re paying overall on top of the car value.

What happens at the end of a hire purchase agreement?

At the end of your hire purchase agreement’s payment term, once the final installment has been paid, the car will be yours.

Depending on your agreement, you may also have the option to make a lump-sum payment for the remainder of the loan and become the owner of the car earlier than originally agreed.

Hire purchase advantages and disadvantages

A hire purchase agreement can be ideal if you’re looking to get out on the road and don’t have the immediate funds to hand.

But, like any form of borrowing, there are things to consider that may make it less suitable for your needs and individual circumstances, compared to other car finance options.

It’s important to weigh up all of the pros and cons before making a decision on whether a hire purchase agreement is right for you.

Advantages of hire purchase

Spread the cost

It goes without saying, one of the biggest advantages of hire purchase is that it allows you to acquire a car that you otherwise wouldn’t be able to afford, by spreading the cost over a series of months or even years.

This means you can get the right car for your needs, without needing to settle for something lower cost, or having to go without a car while you save.

Option to get a newer, higher spec car

Because hire purchase allows you to shop for cars that would otherwise have been outside of your price range, it also means you can consider something a little newer or upmarket. The benefit of this is that newer cars will often come with the latest technology, increasing the car’s efficiency and improving on safety features like parking  sensors. This will mean that you might spend less in the long run, whether it’s savings on fuel, or spending less on repairs.

Fixed monthly payments

Unlike other forms of borrowing, where the amount repayable each month may fluctuate based on interest rates and other factors, hire purchase agreement payments will remain fixed. This makes them a convenient way to finance a car purchase, providing you are happy with the payment agreement and can budget for it accordingly.

Flexible repayment terms, including paying off early in some cases

Most lenders will allow you to opt for a longer repayment term to reduce the cost of the monthly payments. It’s worth keeping in mind that, while the monthly payments will be lower, a longer repayment term will increase the total interest paid and therefore the total amount paid at the end of the agreement.

You might also have the option to pay the agreement off early too, which can be great if you find yourself with some extra cash part way through the repayment term.

Less dependent on credit score

Compared to other forms of borrowing, hire purchase agreements are generally less impacted by credit rating. So if you find yourself in a rough patch and worry about your credit rating affecting your odds of approval, hire purchase might be an appealing option.

Disadvantages of hire purchase

You don’t own the car until you make the final payment

While hire purchase gives you immediate access to the car, it remains the legal property of the lender until the final payment is made. If payments are missed, lenders have the right to repossess the vehicle.

As the name suggests, you are effectively hiring the vehicle from the lender until you have repaid its total value plus any interest.

Higher overall cost than if you bought the car outright

A hire purchase agreement’s value will be the combined total of the car’s price and the interest that the lender charges.

The interest charged will vary depending on your circumstances and the payment term agreed. A shorter payment term will require you to pay more towards the car’s value each month, but will typically result in less overall interest. By contrast, a longer payment term will make the monthly payments more affordable, but the total amount paid at the end of the agreement will be higher due to the increased interest.

Interest rates are impacted by credit score

While your credit score is less likely to affect your chances of approval with a hire purchase agreement, it will directly impact the interest rate for your agreement.

To get the best interest rates on a hire purchase agreement, you ideally want to have a good credit rating.

Missed payments can impact your credit score

Once you have started the hire purchase agreement, missing a payment can have a negative impact on your credit score.

This is why it’s important to be sure that the agreement is affordable for you each month for the full payment schedule, before committing to anything.

Hire purchase advantages and disadvantages in summary

Advantages of hire purchaseDisadvantages of hire purchase
Spread the cost of the car over smaller, fixed monthly paymentsTotal cost will be higher than if you bought the car outright with cash
Option to get a newer, higher spec carRisk of the car being repossessed if payments are missed
Own the car once the final payment has been madeYou don’t own the car until you make the final payment
Flexible repayment terms, including paying-off early in some casesInterest payments are affected by credit score
Approval less dependent on credit scoreMissed payments impact credit score

Hire purchase vs other car finance options

A hire purchase agreement is just one of the car finance options available to you when considering a new car purchase.

Here are some of the key differences between other forms of car finance and hire purchase, to help you make an informed decision on what’s right for your needs.

Hire purchase vs personal contract purchase (PCP)

A personal contract purchase is effectively a form of hire purchase, which sets a large portion of the car’s cost aside until the end of the agreement. 

So while a hire purchase agreement divides the total cost of the car into fixed monthly payments that are evenly spread over a few years, personal contract purchase will typically feature a number of smaller monthly payments, with a larger payment at the end of the agreement.

While this might seem like putting off an inevitable big expense until the end of the agreement, it doesn’t have to be the case. With a personal contract purchase you can choose to return the car to the lender, instead of making the final payment to own the car.

If you’re looking for lower monthly payments and aren’t bothered about whether or not you will own the car at the end, then personal contract purchase might be a good alternative. Otherwise, if you are set on owning the car once the final payment has been made, hire purchase might be preferable.

Hire purchase vs leasing

Leasing is a form of long-term car rental, involving an initial fee and a series of monthly payments.

At no point during a lease do you own the car. At the end of the agreement, once all payments have been made, the vehicle will be collected and you can choose to take out another deal. You will also need to keep the vehicle in good condition and within an agreed mileage allowance.

The main benefit of leasing over hire purchase is that it allows you to drive a newer car every few years with affordable monthly payments. However, this also means that you do not own the car, making you responsible for wear and tear, as well as being constrained to the agreed mileage.

If car ownership isn’t a priority, then leasing can be a good option to consider.

Hire purchase vs personal loan

Funding a car with a personal loan involves borrowing money from the lender, and then using that to pay for the car.

As far as the car dealer is concerned, it is effectively the same as paying in cash. The benefit of this is that you have no ties to the car dealer and the car is yours from the very beginning.

However, while there aren’t any responsibilities to the car dealer, you will have commitments to the terms of the personal loan, as agreed with the lender. This will typically involve a monthly repayment plan that you should stick to, to avoid negative impacts on your credit score or additional interest charges.

It helps to shop around, as you might find that a personal loan with the right lender can save more than the equivalent on hire purchase. Doing so would allow you to afford a better model for the same overall cost as you would have paid with hire purchase. 

Is hire purchase right for me?

Hire purchase can be a popular way to finance a car if you’re looking for something a bit pricier and want to own it at the end of the agreement.

If you’ve decided that a hire purchase agreement is the right finance option for your next car, then finding the right deal can be a bit of a minefield. But don’t worry—we can help. We’ll start by searching the landscape and providing you with a few simple options to choose from, including:

  • Hire purchase agreements up to £200,000 with terms over 1 to 6 years
  • Conditional sale from £4,000 to £25,000 over 3 to 5 years
  • Personal car loans from £500 to £30,000 over 1 to 7 years

If you’re not sure where to start with your car search, many hire purchase lenders have a network of lender approved dealerships. So, once you’ve got your finance sorted, your lender could help point you in the right direction.

For help finding the best car finance option for your needs, get started with our eligibility checker.