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Hire Purchase Explained

Car finance has become one of, if not THE, most popular ways to fund the purchase of a new car. Being able to break down the cost of your new car into smaller monthly payments means drivers can often afford a car much more expensive than one they would need to buy with savings.

One of the popular car finance packages is a hire purchase agreement. What is it and how does it work? We explain all you need to know about this form of finance below.

What is Hire Purchase Agreement?

A hire purchase agreement is a type of car finance product where the cost of the car and the interest on the finance package is spread across the cost of the entire agreement. That means that every monthly payment is the same, so the amount you pay doesn’t fluctuate across the agreement. This is because the interest rate is fixed.

For example:

John wants to buy a car at £5,000 over 24 months. Interest rate is 10%. So the total cost of the finance package is £5,500. The monthly payments would then be calculated by dividing this figure by 24.

So £5,500 divided by 24 equals £230.00 per month.

Note these figures are illustrative only, and don’t factor other potential fees that may be incurred.

What Are the Key Features of a Hire Purchase Agreement?

The key selling point of a hire purchase plan is that you know exactly how much it will cost you across the entire agreement. You don’t have to worry about fluctuating interest rates and markets. These fixed monthly payments also allow you to accurately budget how much you are spending each month, so you can better balance your budget.

Another key factor is the ability to pay off the agreement early. Because you know the total amount owed at all times, if your financial circumstances change and you come into some money – be it inheritance or a lottery win! – then you can pay the rest of the money owed in the agreement and claim ownership of the car.

Another benefit of hire purchase is that there are no annual mileage limits or condition requirements. In other finance agreements, such as a Personal Contract Purchase (PCP), because you have the option to return the car at the end of the deal, you are limited to the amount of miles you drive each year and any bumps or scrapes can incur hefty penalties.

Do I Need A Deposit?

While not a necessary requirement, the larger your deposit, the lower the monthly payments you have to make across the agreement. It will also reduce the amount of interest you have to pay, meaning you end up paying less overall.

A Note to Remember

Like all finance agreements, you don’t own the car until you reach the end of the agreement and have paid off all the outstanding fees. There is also a danger with a fixed interest rate that you could end up missing out on potential savings if they were to decrease.

Car Finance Advice  23/04/2019 10:03:41



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