Hire Purchase (HP)
Hire Purchase is a finance agreement where you pay a deposit, then fixed monthly instalments, and own the item outright at the end. It is most commonly used for cars but applies to other big-ticket goods. You hire the item from the lender until the final payment.
You buy a car priced at £15,000 with a £3,000 deposit and £12,000 financed on HP over four years. You make the monthly payments, and at the end of the term, ownership transfers to you.
- You do not own the car on HP until the final payment is made. You are technically hiring it until then.
- If you fall behind on payments before paying off half the balance, the lender can repossess without a court order. Once half is paid (the 'protected goods' point), they need a court order.
- HP differs from a personal loan: with HP, the car is the security. With a personal loan to buy a car, you own the car immediately and the loan is separate.
Why it matters
HP is one of the three main UK car finance routes, alongside Personal Contract Purchase (PCP) and using a personal loan. It is straightforward: you pay a deposit, then equal instalments, then the car is yours.
Two HP features matter for borrowers in financial difficulty:
- Voluntary termination at half-paid. Under the Consumer Credit Act, once you have paid (or offered to pay) at least 50% of the total amount payable, you can hand the car back and walk away from the agreement.
- Repossession before half-paid. If you miss payments before reaching the protected-goods threshold, the lender can take the car back. After that point, they need a court order.
Common confusion
The most common mix-up is between HP and PCP. They look similar at the start (deposit plus monthly payments) but end differently. With HP you own the car at the end. With PCP you have a choice at the end: pay a large optional final payment to keep the car, hand it back, or use any equity towards the next car.
Another confusion is between HP and using a personal loan to buy a car. On HP, the lender owns the car until the final payment. On a personal loan, you own the car from day one and the loan is a separate debt. If you sell the car, the HP lender’s interest matters; on a personal loan, you can sell freely (you still owe the loan, but the car is yours to dispose of).