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30th January 2020

A guide to hire purchase

hire purchase car financeHire purchase is a popular approach to financing the purchase of a new or used car. Finding the cash up front for a new car isn’t always realistic and hire purchase can be a practical option for spreading the cost of a new vehicle over an agreed period of time.

How does hire purchase work?

The customer may have to pay an initial deposit and then the remaining cost of the vehicle is spread across monthly payments over an agreed period of time. Typically, over a three to five-year period. At the end of this period the customer pays what is often referred to as an option to purchase or ownership transfer fee and then takes official ownership of the vehicle.

With a hire purchase agreement, the monthly payments will be calculated based on the following:

  • the cost of the vehicle
  • the initial deposit paid
  • the agreed length of the finance deal and
  • the APR interest rate

As the name suggests the car is being “hired” whilst the agreement is in place, this means that it is officially owned by the finance company until the final payments have been made.

Hire purchase gives customer’s certain rights to return the vehicle once half of the total balance is repaid, but also gives rights to the Hire Purchase granting company to recover or repossess the vehicle in the event of late or defaulted payments.

Finding a car

Hire purchase is available on new or used cars so car buyers can visit car showrooms or browse online for the vehicle which matches their criteria before putting a finance agreement in place once they have found the right car.

Arranging hire purchase

Usually a buyer will find their chosen car first before arranging finance but it is always a good idea to plan ahead and consider the affordability of monthly payments and the length of a hire purchase agreement.

When buying through a reputable dealer the dealership or regulated credit broker will offer the option to complete the purchase using a finance arrangement such as a hire purchase agreement.  This process is usually quick and straightforward. With a specialist finance company such as SMF, a credit decision can be made seven days a week, which is ideal as many car buyers shop around on the weekend. Once agreed the loan advance can be paid out (subject to conditions) which means in many cases the new car can be driven away the same day.