Hire purchase

When you use a HP agreement to buy a car, the car dealer sells the car to the finance company. The finance company then rents the car to you for an agreed period, usually for a set monthly repayment over several years. However, some HP agreements will have a balloon payment at the end of the agreement which is normally higher than your usual monthly repayments.

During the agreement, you can use the car but the finance company actually owns it. They are the owner, and you are the hirer. The finance company may be able to repossess (take back) the car if you fall behind with your payments. At the end of the agreement, the finance company passes ownership of the car to you, provided you have made all the repayments.

As with other types of credit, when you take out a HP agreement, your finance company will send details of the repayments you make to a credit reference agency. Find out more about what information is shown in your credit history.

The total amount you pay back to the finance company is called the total HP price. It is made up of:

• the cash price of the vehicle, plus
• interest, plus
• fees to set up and end the agreement

The interest rate on HP agreements varies depending on the finance company. Given that the interest rate is fixed for the term of the agreement, you cannot usually increase your repayments each month if you wish to do so.

As well as interest, there are fees which may be charged on a HP agreement, including:

• Documentation fee
  This is a fee for setting up the agreement. It can vary between €50 to €150.
• Interest surcharge for missed repayments
  A higher rate of interest may be charged on any repayments you missed.
• Penalty fee for missed repayments
  This is charged for missed or late repayments, in addition to the interest surcharge. It is usually about €25.
• Completion fee
  This is a fee to end the agreement and to allow ownership of the goods to pass to you. It can vary between €50 and €75.
• Repossession charge
  If the finance company repossesses the car, you will be charged a fee, usually around €300.
• Rescheduling charge
  If your finance company agrees to change the terms of the agreement, you may be charged about €60-€70

If you pay off your agreement early and keep the car, you may be entitled to a discount on the interest you have to pay. This is known as an ‘interest rebate’. But, if you pay off the agreement early, you will not save as much in interest as you might with other types of credit. This is because with a HP agreement it is up to the finance company to decide what interest rebate they will give you.

When comparing your options, make sure you compare the total amount payable on a personal loan (cost of credit) with the total HP price (the original amount of finance, plus interest and fees). Use our personal loan cost comparisons to help you.

If you have problems making repayments on a HP agreement, there are options available to you, including:

• Returning the car under the half rule
• Voluntary surrender

To learn more about these options, see our content on problems making car repayments.

When you buy goods, including cars from a car dealer, you have consumer rights. If you buy a car on HP and find a fault, the finance company to whom you are making your monthly repayments are responsible for fixing the issue as they are the legal owners of the car. As a practical first step, you can return to the dealer you bought the car from and ask them to fix it.

If the finance company will not help you resolve the issue you can go through their complaints process and if necessary escalate it to the Financial Services and Pensions Ombudsman.