Hire purchase is a hire agreement between a customer and a finance company secured against the vehicle, where the customer has the option to own the vehicle at some point during or after the agreement. The finance company HIRES the vehicle to the customer for an agreed period of time at an agreed monthly sum. The customer can gain ownership (title to the car) by paying an additional sum called the Option to Purchase Fee.
- Deposit – usually optional at the discretion of the customer
- Fees – there are usually fees attached to a HP agreement
- Payments – payments are fixed for the duration of the agreement
- Mileage – there are no mileage restrictions on a HP agreement
- Insurance – the vehicle will need to be comprehensively insured for the period of hire
- Condition – the customer must keep the vehicle in roadworthy condition
- Interest Rate – the interest rate is fixed for the duration of the agreement
A HP agreement can be settled at any time by the customer by paying the balance of finance outstanding and Option to Purchase fee to the lender. The lender may allow the customer a rebate of the interest if the outstanding finance balance is settled before the agreement end date. If it is a HP agreement regulated by the FCA, then the minimum amount of rebate will be set out in the FCA’s rules. You can make additional payments & receive a corresponding reduction in interest.
End of the agreement
At the end of a HP agreement, once all the contracted payments have been made, the customer will usually pay the Option to Purchase fee and take the legal title to the goods. However, this is a true option. The customer could return the vehicle to the finance company (even though the vehicle has effectively been paid for).
Voluntary termination, also referred to as the Half Rule, allows a customer to terminate the agreement & hand the vehicle back to the lender. To do this, half of the total amount repayable in the agreement must have been paid. This is the full price of the car plus the total interest in charges & fees. The vehicle must be in a reasonable condition for its age and mileage & any arrears will also have to be paid.