HP Finance Explained
With a commitment to trust and transparency, we here at Carbase pride ourselves on clear and concise customer service. We understand that vehicle finance is one of the most jargon-heavy and potentially confusing aspects of car or van ownership, which is why we look to create straightforward and user-friendly articles about it.
This is our latest guide to Hire Purchase (HP) finance - what exactly it is, how it works, what to ask yourself when thinking about taking out HP vehicle finance, and the potential risks to consider.
What is HP finance?
Hire Purchase vehicle finance, or HP finance, is a type of loan designed to help you buy a car or van. There are two main types of vehicle finance, the other is Personal Contract Payment (PCP) - you can find a guide all about PCP finance here. An HP finance deal can be used to cover the costs of a new or used car or van. For many people, the large upfront expense of buying a vehicle outright are simply not an option, which is why most drivers choose to take out a vehicle loan, such as HP finance.
Of course, any bank loan or personal loan could be put towards a new or used car or van, but HP finance is specifically designed to complement vehicle ownership and make it as accessible as possible by spreading the cost. The main difference between a regular loan and HP finance is that you won't own the vehicle completely until the end of the HP finance agreement, once you have paid off the total cost of the vehicle, plus interest. Hence the name - Hire Purchase; you effectively 'hire' the vehicle during the HP agreement term, until the final payment when you come to own it outright.
A HP finance deal can be broken down into two main elements:
A HP finance agreement starts with a deposit, which is usually around 10 per cent of the vehicle's price. The higher the deposit, the lower your monthly payments.
The rest of the vehicle's value (minus the deposit and plus interest) is then paid off month by month over the HP agreement term, which could be anything from one to seven years.
How does HP work?
Let's look at a hypothetical example of an HP agreement to illustrate how it works in more detail. Imagine you have found a Carbase used car or Vanbase used van that's right for you, and now you want to take out HP finance to spread the cost of ownership.
Your chosen car or van has a ticket price of £15,000 and you have a 10% deposit of £1,500 to put down. You would need to decide how long you want the HP agreement to last - a shorter loan term will enable you to own the vehicle outright sooner, but through higher monthly payments. A longer term will mean paying more monthly payments and interest on the loan, but the monthly payments will be lower.
Similarly, putting down a higher deposit would reduce your monthly repayments and the interest payable. You'll need to pass a credit check in order to take out the HP loan, and you need to ensure that you can afford the monthly payments, so it's important to think carefully about your deposit amount and loan term. Once approved, a HP loan term of three years means your monthly repayments would be £375, plus a fixed level of interest. Once you pay the final repayment, the vehicle will be yours.
HP loan amount:
£13,500 (£15,000 minus deposit of £1,500)
£13,500 divided by three years (36 months) = £375 plus interest.
Explore more HP finance examples with our car finance calculator or van finance calculator - clicking the HP button to view HP finance deals only. Simply enter a vehicle price and loan repayment term, and we'll show you what sort of monthly repayment you can expect to pay.
Can I settle a HP finance deal early?
Yes, you can. If your financial circumstances change and you want to pay off what you still owe on your HP finance agreement before the end of the term, in one go, you can do so with no penalty. Your lender will generate a total settlement figure and once this is paid, you'll immediately own the vehicle outright.
Pros and cons of HP finance
HP finance comes with plenty of benefits when it comes to buying a vehicle, but there are potential pitfalls to be aware of too.
Advantages of HP finance
It spreads the cost of vehicle ownership - If you don't have the funds to buy a used car or used van outright, HP finance enables you to spread the cost over a timeframe that suits you. What's more, the vehicle is officially yours once you make that final payment.
No mileage limits - With HP finance, there's no need to keep an eye on how many miles you clock up. Unlike PCP finance, there are no potential penalties for exceeding a set number of miles during the agreement.
No balloon payment - The monthly payments you make with an HP finance deal are all the same, so there's no larger, balloon payment necessary at the end of the agreement, as there is with a PCP finance deal.
Disadvantages of PCP finance
You won't own the vehicle during the loan term - The vehicle won't belong to you until you make the final payment.
Higher monthly payments - The monthly costs of an HP finance agreement are higher than that of a PCP finance deal - this is because the loan covers the entire value of the vehicle, rather than just a portion of it.
Potential repossession - If you miss HP finance payments, your lender could repossess the vehicle - without a court order if you have paid off less than a third of its value.
Is HP finance right for me?
There's a lot to like about HP finance, but this type of vehicle finance won't suit everyone. When you understand the ins and outs of HP finance, you can weigh it up against your individual circumstances.
In most cases though, HP finance is a good choice for people who know they want to own a vehicle at the end of a finance agreement, whether they want to keep it or sell it on privately. If you'd rather have the option of returning the vehicle to the lender, a PCP finance deal may well be a better fit.
If you're still not sure which type of vehicle finance is right for you, why not get in touch with our friendly team at Carbase or Vanbase? We can help you run through the vehicle finance options open to you with a balanced and unbiased view, so that you can drive away in your chosen used car or van with a finance agreement that comfortably fits your budget, lifestyle and future plans.
Sub-prime finance is not guaranteed and may cost more than finance provided by a prime lender. We will try to obtain finance for you but there is no guarantee. It may be from a sub-prime lender, and if so, the cost of finance may likely be at a higher rate than prime lenders offer.
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