Hire purchase is one of the most popular types of vehicle finance in the UK and is ideal for consumers wanting a simple agreement with fixed monthly payments that allow for ownership of the vehicle once all payments have been made.
A hire purchase agreement works by offering you a secured car loan against the vehicle that you are purchasing.
In simple terms you are hiring the vehicle off the lender and paying a fixed monthly payment (including interest) over an agreed term. Once all of your monthly payments and the option to purchase fee has been paid in full you will then be the legal owner of this vehicle.
Personal contract purchase otherwise known as PCP is similar in principle to a hire purchase product, however it actually works more like a leasing product.
Instead of paying off the entire value of the car in monthly instalments you are effectively only paying off the cars depreciation, hence the lower monthly payments. At the end of your PCP agreement there will be a lump sum outstanding which is commonly referred to as the balloon payment.
You will have several options as to how you would like to deal with this final amount, depending on whether or not you want to keep the car or change it.
- Pay the outstanding balance, either in cash or by re-financing the balloon payment
- Hand the car back
- Use your vehicle as a part-exchange for another
Lease purchase works in a similar way to hire purchase. It requires you to make monthly repayments but also allows you to defer part of the total cost of the car to back end of the agreement, called a balloon payment.
Up to 31% of the total cars value can be deferred – this is usually calculated on the cars residual value and in order to settle the lease the balloon payment must be paid. This lump sum can either be paid off in cash or re-financed on a standard hire purchase product.
As with most leasing products a maximum mileage limit will have to be agreed from the outset as this is what the lender will use to determine the residual value of the vehicle at the end of the contract.
Contract hire is the most common form of leasing and must not be confused with a car loan. Contract hire is where you simply hire the vehicle from the leasing company over a set period. In that period it’s yours to drive around in, however you will never have the option of owning it.
