Second-hand Hire Purchase (HP) finance

Want to own your car once you've made all the monthly payments - but with the lowest possible instalments? Check out used car Hire Purchase

BuyaCar team
May 30, 2020

If you’re planning to buy a used car on finance, then you’re in good company. Millions of drivers have chosen to take out car finance over the last few years alone, with more than 90% of new cars now being financed, along with a rapidly increasing proportion of used cars.

Drivers are using finance to afford newer and safer models, with cleaner emissions and more modern technology. Brand new cars may have high prices and, as a result, high monthly payments, but that needn't be the case if you look at nearly-new or used cars.

Many of these cars are financed using Hire Purchase (HP), which is available on virtually any car, and sees you own the car outright one you've made all the monthly payments. Alternatively, Personal Contract Purchase (PCP) comes with lower monthly payments - as these only cover part of the car's value - and the option to return the car at the end of the agreement. If you want to own the car, however, remember that you'll have to make the large optional final payment to be able to keep the keys.

Scroll down for more information on buying a second-hand car with Hire Purchase, or watch our video guide to get a feel for whether Hire Purchase is for you.

Hire Purchase finance

Hire Purchase finance splits the cost of a car into equal monthly instalments. Contracts typically last for between two and four years and once you've made the final monthly payment, you’ll own the vehicle.

Most buyers put down a deposit, although a no-deposit option is often available. Be aware, though, that the higher the deposit you put down, the lower your monthly payments will be and the less interest you'll pay - as you're borrowing less. Also bear in mind that the deposit goes towards paying off the car, so don't expect it to be returned at the end of the contract.

 How HP finance works

1. Deposit & delivery

  • A deposit reduces the amount owed. A no-deposit option may be available

2. Monthly payments

  • Pay for the rest of the car with fixed monthly instalments

3. You own the car

  • Once the final payment is made, the car is yours

 

HP finance pros and cons

Good for

✔  Spreading the cost of your car
✔  No mileage restriction
✔  Available for most vehicles
✔  No-deposit option

Not so good for

Cheapest monthly payments
Regular car upgrades
Flexibility - you own the car at the end
Protection against the car dropping in value

 

 

Hire Purchase or PCP?

Personal Contract Purchase (PCP) finance offers more flexibility and lower monthly payments than HP. That’s because monthly payments only cover part of the car’s cost, leaving you with the option to return the car or buy it at the end by making the optional final payment.

Low monthly payments and flexibility have made PCP the most popular type of car finance, but it’s not the best option for everyone. We’ve highlighted some of the key differences below.

Monthly payments

Monthly payments with PCP finance are lower than with Hire Purchase because they don’t cover the full cost of the car. This can enable you to drive a newer and more expensive vehicle but will mean that you don’t own the car at the end unless you make a further large payment at the end.

Flexibility

Both types of finance usually allow you to adjust your deposit and agreement length - which have an impact on your monthly payments - to enable you to find a combination that suits you.

However, PCP is far more flexible at the end of the agreement, with the ability to return the car and walk away, trade it in for another or buy it for an additional pre-agreed sum, which can be refinanced.

If the car is worth more than the cost of buying it at this stage, then you can trade it in and use the difference to put towards the deposit on another vehicle.

Total amount payable

If you take out PCP finance and then return the car at the end, you'll have spent less than paying for a car outright - although you’ll have nothing to show for what you have paid, as you have effectively rented the car. Make the optional final payment to buy the car and you'll have paid more overall than with an equivalent Hire Purcase deal, though (assuming the same deposit and contract length), as you're paying off the amount owed more slowly, meaning more interest is charged.

Hire Purchase’s higher monthly payments mean that you clear your debt more quickly than with PCP, where you continue to owe (and pay interest on) the large optional final payment until the very end of the agreement.

So if you do want to own your car at the end of the agreement, Hire Purchase is likely to be a cheaper option.

Car age

Both HP and PCP car finance are available for new and used cars. While PCP is normally only available on cars up to around five years old, however, Hire Purchase is available on older cars as well.

Once a car is more than five years old, it becomes difficult to establish its likely future value, so PCP becomes less common. Hire Purchase continues to be available for these older cars, though.

PCP monthly payments add up to the amount that a car is expected to lose over the course of the arrangement. You'll then have the option of making the final payment to own the car. This means that for the lowest monthly payments opting for a used car and paying for it with PCP should get you the lowest possible monthly payments.

Future value guarantee

One major advantage of PCP finance is that you're protected even if the value of the car you're driving drops dramatically.

That’s because its future value is estimated at the start of the agreement and used to calculate your monthly payments. This is known as the optional final payment, the balloon payment or the 'Guaranteed Minimum Future Value' (GMFV).

No matter what happens in the used car market, you can return the car at the end of the agreement. If the car is worth less than the GMFV, then the finance company will lose out, not you.

If the car is worth more than the optional final payment at the end of the contract, you don’t have to forfeit this surplus: by trading the car in or selling it yourself - with the agreement of the lender, since you don't own the car unless you make the optional final payment - you can use the difference towards the deposit on your next car.

 

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