Hire purchase is a common name for this type of agreement in the UK, but it’s also known as ‘hire and buy’ or even just ‘paying in instalments’.
Hire purchase agreements are very similar to traditional car finance deals, such as asset-backed finance. Customers don’t pay anything until after the hire purchase agreement gets signed.
This makes them a very popular option for people who want to buy a car or other expensive items, but don’t have the money upfront. In this complete guide, we will tell you everything you need to know about Hire Purchase Agreements in the UK.
What Is A Hire Purchase Agreement?
Hire purchase agreements are a popular form of financing, particularly for vehicles, in the UK.
They allow you to pay for your vehicle gradually over time in instalments, instead of paying all at once like with an outright cash payment. While you are still making payments, within the agreement terms, the contract works similarly to a rental agreement which is why it’s called hire purchase.
Under this type of contract, the seller transfers ownership of an item to the buyer at the end of the agreement when all the payments are complete. A hire purchase agreement is similar in some ways to financing through a bank or other financial institution.
The Major Differences Between Traditional Finance and Hire Purchase
The major difference between a traditional bank loan or credit card and a hire purchase agreement is that when you finance with a hire purchase agreement, you don’t actually own the property until you pay off your final payment.
However, with traditional lending such as using a bank loan to buy something, you do own the product such as a vehicle from day one. Then, the amount of money you borrowed is owed to the bank to repay the loan.
When you enter into a hire purchase agreement, you simply make monthly payments. It’s similar to a rental agreement until you own your property outright, at the end of the agreement period.
What If Someone Fails To Make a Payment?
If you fail to pay the agreed instalments, the seller can recover their goods, such as a car by taking it back from the customer.
That makes hire purchase agreements a lower risk option for the seller because they either get paid in full or they get to take back the asset. It also makes hire purchase agreements available to those with less than perfect credit ratings. That’s because the agreement is not credit-based.
Hire purchase agreements are different from traditional lending. However, they are still regulated by the Consumer Credit Act 1974, so you get the same consumer rights as you would with other forms of credit.
Hire Purchase Tips
- Know what you’re getting into before signing anything. Hire purchase agreements can be complicated. So, make sure you understand all the terms and conditions before committing.
- Always read the fine print! If something seems too good to be true, it probably is. Be critical of any hire purchase agreement and ask questions if there’s anything you don’t understand.
- Make sure you have a good understanding of the products you’re buying. Hire purchase agreements are normally used for big-ticket items. So, make sure that the product is right for your home and needs before committing to it.
- If possible, pay off hire purchase instalments in advance instead of paying on a monthly basis. In some cases, this can save you money!
- Take a good look at your credit report before signing a hire purchase agreement. Hire purchase agreements are normally offered to people with poor or no credit history. So, it’s important you know where you stand financially beforehand.
- Hire purchases can be expensive in the long run because of high-interest rates and monthly instalments! Be sure that this type of agreement is the right one for you.
- Hire purchase agreements can be a great way to buy big-ticket items, but only if you’re sure you can afford the monthly instalments. Be responsible with your money and don’t overspend just because you have the option to get something on hire purchase.
- Think about the length of the commitment. While a hire purchase agreement can last for up to nine years, most agreements last for no more than two years. Therefore, if you know that you will be moving house or changing the item within this time period, you may want to consider a different type of financing.
It’s Not Yours Until The Agreement Ends
With some hire purchase agreements, you may be able to put down a deposit on a large purchase, to get an item for a lower monthly payment plan. But, remember even if you put down a deposit the goods, items taken on hire purchase plans are not fully yours until the agreement is complete.
When people lose the items they had bought on hire purchase, for example through theft or fire damage, they still have to keep making payments on those goods. So, checking the insurance elements of an agreement is essential to make sure that you are covered and won’t end up paying for an item you are unable to use.
Why Are Hire Purchase Agreements So Popular?
Hire purchase agreements are an excellent way to buy a car, without needing perfect credit.
They can also be offered on other products such as laptops and furniture so you don’t need the cash right away! You simply make monthly payments until it’s paid off.
Hire purchases usually have lower interest rates and longer terms than other types of loans, so it’s a good option if you need more time to pay off the debt.
Another benefit to using a hire purchase agreement is that you can still trade-in or resell your items once you have paid off your hire purchase agreement. You won’t be stuck with an item that you no longer want or need. It’s a good alternative to renting because at the end of what would be the rental period you own the item you have been using and paying for.
What Can You Buy On Hire Purchase?
What can you buy using a hire purchase agreement? The short answer is anything, however the main items that people buy on these kinds of agreements are cars, furniture and white goods such as washing machines. Hire purchase agreements are most commonly used by people who do not have the money to pay for their orders in one go.
That means they appeal most to the least financially secure members of society. Hire purchase agreements can be a helpful way for people to spread the cost of expensive items over time. They can also become a crutch that people lean on too heavily instead of saving up for what they want.
Hire purchase agreements usually also offer some protection to customers, such as a warranty if something goes wrong with the goods that have been bought.
Hire Purchase For Anything Other Than Vehicles Is Losing Popularity
Although hire purchase agreements used to be very popular in the UK, their popularity has declined in recent years. This may be because there are now more financing options available to people when it comes to buying expensive items.
Or it could be because the recession has made people more cautious about taking on any kind of debt.
Hire purchase agreements are still a popular way of financing cars, however. This is partly because car dealerships often offer very good deals on finance when you buy a car from them.
If you’re going to be financing a car on hire purchase, you should ensure that the finance company offers some kind of protection or insurance in case the car is written off or stolen.
Hire purchase agreements can be expensive if they are not used correctly so it’s important to understand what your obligations will be before signing one.
If you’re looking for help with a hire purchase agreement, Parkins Finance can assist you. We have years of experience in the industry and can help you find the best deal on finance.
We also offer a range of protection products to ensure that your items are covered in case of damage or theft. Get in touch with our founder Chris Parkins to learn more.
Terms and Conditions: What You Need to Know Before You Sign
So, what are the typical legal stipulations of a Hire Purchase Agreement?
A Hire Purchase agreement can also be referred to as HP, HPA or HPC depending on the country you’re living in. Its legal stipulations are usually written into the terms and conditions and here’s a summary of some common contractual terms.
- The buyer agrees to make monthly payments for the duration of the contract.
- The total cost of the item is divided into equal monthly instalments.
- If the buyer defaults on a payment, they may be subject to late fees or interest charges.
- Failure to pay off the Hire Purchase Agreement in full will result in the buyer owing the full price of the item plus interest or the item being reclaimed by the seller.
- A Hire Purchase Agreement can be used to purchase new or used items.
- The agreement is usually non-cancellable and cannot be transferred to another party without written consent from the seller.
When you’re signing a Hire Purchase Agreement, it’s important that you read the terms and conditions carefully to make sure that you understand what you’re agreeing to. If there are any unclear aspects of the contract, don’t hesitate to ask your lender for more information.
By understanding the basics of Hire Purchase Agreements, you can be sure that you’re making an informed decision when borrowing money to purchase an item.
Business Hire Purchase Agreements Are Great For Small Businesses
This blog has only covered personal hire purchase agreements so far but what about business hire purchase agreements?
Business hire purchase is experiencing a boom right now. Figures that were released by the Finance & Leasing Association (FLA) show that total asset finance new business (primarily leasing and hire purchase) grew in November 2021 by 5%.
In fact, in the 11 months to November 2021, new business was 16% higher than it was for the same period in 2020.
Hire purchase agreements are perfect for small businesses when they need to buy equipment or machinery that is large enough in value to warrant a business loan. Hire purchase can be used by companies of all sizes and it will allow them the freedom to make flexible payment plans with low monthly payments.
Some items that businesses buy on hire purchase agreements include vehicles, photocopiers, furniture, machinery and even property (such as rent-to-own homes or premises). Hire purchase agreements can also be used to consolidate other debts into one monthly payment or to spread the cost of a large purchase over a number of months or years.
The key benefits for businesses that take out hire purchase agreements are:
- The ability to buy essential equipment or machinery that they may not be able to afford outright.
- The ability to spread the cost of a large purchase over a number of months or years.
- Low monthly payments.
- Flexible payment plans.
Business hire purchase agreements are a great way for small businesses to get the equipment and machinery that they need without breaking the bank. If you are looking to purchase equipment or machinery for your business, speak to a hire purchase specialist today (like us here at Parkins Finance) and see how we could help you.
We Hope You Enjoyed Learning More About Hire Purchase Agreements
Hire purchase agreements are a great alternative to renting something if you want the money you invest to remain valuable to you and you are certain you can keep up with payments.
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