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HP Car Finance Explained

HP Car Finance Explained



HP (hire purchase) is a finance option for car buyers. See if it’s a good choice for you in this guide, and what your options are when your agreement ends

What is hire purchase (HP) finance?

HP stands for hire purchase and is a way of buying a car by paying for it in monthly instalments over a fixed period. Hire purchase splits the car’s cost across a series of monthly repayments, usually over three to five years. You’ll usually have to pay a deposit up front.

HP might be the best choice for you if you know you want to own the car outright at the end of the finance agreement. In comparison, PCP finance means you have to pay a lump sum at the end of the agreement to own the car, or hand it back to the finance provider.

The monthly payments for a car on HP finance will be higher than the same car on PCP but, without the balloon payment at the end, HP’s total cost will almost certainly be lower than PCP for buyers that want to own the car. Read on to learn more:

How does HP car finance work?

The first stage to buying a car on HP is to decide what model you’d like – making sure you can afford the monthly payments.

You can then get a personalised HP finance quote for that car. The quote will include your deposit if you choose to pay one along with any value from your old car if you choose to part exchange it. You will then pay a series of monthly payments over a fixed period, usually between three and five years.

Once you’ve paid all the payments, you are the legal owner of the car and can do whatever you want with it. You could run it for many more years to get the most out of your investment, or sell it and put the money towards something else – we’ll go into more detail further down this guide.

Here, we’ll talk you through the key elements that go into a HP finance agreement to help you work out if it’s the right choice for you:

  • Deposit: most finance buyers put down a lump sum at the start of the agreement to partially pay off the balance. The larger your deposit, the lower your monthly payments. This will also reduce the amount you pay in interest. Deposits are usually optional on HP deals, however, meaning you can buy the car in exchange for higher monthly payments
  • Monthly payments: these are the regular payments you make to settle the balance of your HP finance, with most deals spread over three to five years. The monthly cost changes depending on the value of the car you choose, the deposit you put down and the interest rate
  • Duration: this is simply how long the finance deal lasts. Typically, this is around three to five years but can be longer or shorter depending on your requirements
  • Interest rate: this percentage determines the amount of interest you pay on the finance deal. You can use this figure to compare different finance quotes to understand how competitive they are
  • Total amount payable: this is the complete cost of the finance, interest and fees over the duration of the agreement. You can look at this figure in relation to the car’s list price to understand how much you will have paid in interest, although this is usually also listed separately in the agreement

Should you buy a car with HP finance?

HP is probably the best choice if you want to own the car outright at the end of your finance agreement. In this scenario, you’d put down an optional deposit and then pay off the remaining cost of the car broken down into monthly payments.

At the end of the agreement, you own the car outright and can do whatever you want with it. This means you can continue to run it for many more years, with only running costs and depreciation to worry about. You could also sell the car once it’s paid off for its market value, using whatever money you get to put towards your next finance agreement.

In general, HP finance might be a better choice for buyers who are looking at owning their vehicle over a longer period. If you want to change your car more regularly, you might be better off looking at PCP finance. One potential disadvantage for HP buyers is that they’ll probably own the vehicle well beyond the manufacturer’s warranty period, meaning they’ll be responsible for any unexpected repair costs that crop up later on in the car’s life. PCP buyers, on the other hand, usually remain within the warranty window, isolating themselves from the majority of unexpected repair bills.

What should you do at the end of a HP finance agreement?

At the end of your HP agreement, you have two options:

  • Continue owning the car without any more monthly payments
  • Sell or part exchange the car and and put the money towards your next car or any other large purchase

Keep reading to understand the pros and cons of each choice.

When is continuing to own the car a good idea?

You should consider continuing to own the car if:

  • You still need a car for transport
  • You like the car
  • You want to make the most out of the money you spent on finance

For most buyers, continuing to own their HP car is the best and most obvious way to end their finance deal. The car is fully paid off at the end of the agreement and owners can continue using it for as long as they see fit, potentially running it for many more years without the burden of monthly payments.

The only real downside here is that, as cars get older, they tend to require more repairs and maintenance to keep them running. Most HP cars will be outside the manufacturer’s warranty by the time the agreement comes to an end, so owners will be responsible for any repair costs that arise after this period.

When should you avoid continuing to own the car?

You might want to avoid continuing to owning the car if:

  • You want to sell the car to buy something else
  • You need to raise a lot of cash

In general, it’s rarely a bad idea to continue owning a car you’ve bought through HP finance because you won’t have to make any more monthly payments towards it. However, if you’ve paid off the car but fancy owning something else, you can sell it and put the money towards your next purchase.

There’s also a chance you might encounter a situation where you suddenly need access to a few thousand pounds, say for emergency home repairs or due to a change in your circumstances. In these situations, you have the flexibility with a car bought through HP to simply sell it for its market value and use the money as you see fit – an equivalent PCP buyer might not have that option because they might still be paying off their balloon payment.

When is selling or part exchanging a HP car a good idea?

You should consider selling or part exchanging your HP finance car if:

  • You want or need a different car
  • You’d like to use the car’s value towards other large costs

Selling a car you’ve bought through HP finance might work for you if you’d like to own a different car – perhaps the one you’ve bought isn’t large enough or uses too much fuel. In this case, you can either sell your current car, putting whatever money you get towards your next car, or arrange a part exchange at the dealership and pay the difference between your old and new cars.

You might also find that your needs change over time. Perhaps you don’t drive as often and rarely use your car, in which case it might be worth selling the car and putting the money towards something else. This could help pay for the dream holiday you’ve always wanted, or that new kitchen you promised yourself.

When should you avoid selling or part exchanging a HP car?

You might want to avoid selling or part exchanging your HP finance car if:

  • You want to make the most of the money you spent on finance

Selling or part exchanging a car you’ve bought on HP finance is unlikely to be the most cost effective outcome. HP buyers face higher monthly costs than PCP buyers for the same car in the knowledge that they’ll own the car outright at the end of the agreement. Typically, the longer you keep the car running after this point, the more cost effective it’ll be because every mile you drive offsets the costs you shouldered when you financed the car.

Not sure about HP, why not take a look at PCP finance?

PCP finance is the most common way to finance a car purchase. Check out our guide to PCP finance to learn more and see the finance options offered on nearly new cars by Motorpoint.