Car Hire Purchase
Understanding HP Finance
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First up, the main difference between hire purchase car finance and PCP (Personal Contract Purchase) is that PCP contains an end payment (otherwise known as a balloon payment) to finalise the agreement and pay off the car. You can make the final payment and own the car outright, or return the car to the lender as a part of the contractual agreement. HP doesn’t contain a final payment but you usually need some kind of upfront deposit ranging from £100 upwards (your old car may also serve as a full or partial deposit.)
Buying a used car on finance via Hire Purchase is a popular way to pay for your next car. The process involves a few steps to purchase which you’ll need to think about before you head over to a car dealer.
How it works
- Generally, a used car needs to be no more than ten years old to qualify and less than 100,000 miles
- The finance company buys the vehicle on your behalf less any deposit that you have paid to the dealer
- The remaining balance plus interest is then paid over an agreed period of one to five years for cars that are up to six years old (or repay over one to four years if the car is six to 10 years old)
- Set your payments to suit your budget – borrow any amount from £1,500 upwards
What you pay
- You pay a flexible deposit on the car, usually around the 10% mark (but this is almost always negotiable)
- Interest rates are fixed so you’ll always know the amount of each payment until the car is yours
- You pay over your chosen period
- After you’ve made all the payments including the interest you own the car
Hire Purchase Calculator
Step 1 – Deposit
If you choose a Hire Purchase agreement to fund your next car you’ll need some kind of deposit as part of the acceptance procedure. Usually, the deposit is around 10% of the sale price. If you own a car that you wish to part exchange it’s fine to use it as part or full payment of your deposit. You will need to own the car outright or have enough equity it in to put towards your next purchase.
If you don’t have a part exchange, a cash payment will be required.
Tip: Having worked with dozens of finance companies over the years I can tell you that deposits are negotiable. The dealer will be applying for your finance to their affiliated finance company such as Black Horse Motor Finance, Zuto or Moto Nova. The dealer wants you to be accepted so they can make the sale, therefore it’s in their own interest to help you along.
So if you’re interested in a car that’s £10,000, you’ll need a part exchange worth at least £1000 or £1000 as a cash deposit.
But I’ve negotiated scores of deals with finance companies that allow the customer to pay only 5% deposit (£500 in this instance.) It does require some work on the part of the dealer but it’s certainly achievable. So if your deposit is limited, all is not lost. You’ll need to talk to the dealer and see if something can be worked out.
However, the customer does need a good credit score in order to accomplish a smaller deposit contribution.
I have negotiated a lower deposit for credit scores ranging from 772 up to 968. As you can see from the image above, scores are rated from 0 as very poor up to 999 for excellent. You may want to get access to your free credit score using Experian.
It’s important to know your credit score and what deposit you have available before going to look at used cars for sale.
Step 2 – Finding the right car finance dealer
Once you know your credit score and the deposit you have available it’s time to start searching for cars at dealerships that can offer you the right finance package. If your credit score is good and you have a reasonable deposit to lay down there is plenty of dealers to choose from that would love to have your business.
If your credit score ranges from slightly below average to very poor your options are more limited. But if you do have a medium credit history score you will most likely get finance at the majority of dealerships you visit, but you will need at least a 10% deposit.
If your history is poor you’ll need to consider Guaranteed Car Finance dealers. There are quite a few around the country and most major cities will have at least one Guaranteed Car Finance dealer. Alternatively, you can ask a family member or close friend to vouch for you as a guarantor. They’ll need a clean credit history (usually a score of at least 750) and be prepared to sign to the agreement and pay your loan should you default.
Step 3 – Your Details and Documents
Here’s what you’ll need in order to apply for Hire Purchase finance on a used car and have a fruitful application
These details may vary from one finance company to another
- To be in full-time employment or be self- employed
- Have a UK bank account
- Have a full driving license
- Identification such as passport
- 2/3Utility bills with your current name and address
- Full address including postcode of any other residence in the last 3 years
- Employment details
- Previous employment details over the last 3 years
- Proof of UK bank account
- Registration documents pertaining to your part exchange (if you have one)
- Other personal documents as requested
Your car will need to be insured as fully comprehensive during the period of the agreement.
I’d recommend getting all of your documents ready and take them with you to the dealers. You can avoid delays by being organised.
HP can be arranged on the same day where necessary, provided there’s no hold up’s with credit scores and/or your documentation.
Once you’ve found your appropriate dealer it’s time for viewing the car
Step 4 – Viewing the car and applying for Hire Purchase
By now you should know your credit score and feel confident that you can obtain finance via the dealers.
If you’re happy with the car (you’ll need to carry out all of the checks in my used car guide) it’s time to negotiate a deal.
Remember that dealers make a good commission from selling you a car finance package. It’s in their interest to win you the deal. They have two profits to earn now, the one from the car and the other from the finance. There may even be a third profit margin for them if you’re part exchanging your old car in. Keep this in mind when it comes to financing and buying from a dealer. In fact, there’s even a fourth profit margin if the dealer feels inclined to try and get it (more on this in a moment.)
Too often I find individuals not bothering to negotiate the best price they possibly can. Just because you want finance doesn’t mean you shouldn’t try and get yourself as much money off as you possibly can; or at least an extended warranty thrown into the deal.
If you are financing your new car you’ll be paying more for it than you otherwise might because of the finance company’s interest charges. Getting a nice discount is more important now than ever!
Remember to iron out a deal before applying for finance. Once those figures have been submitted to the HP Company it can be a lot of messing around should they need adjusting.
Interest Rate vs APR (Annual Percentage Rate)
An interest rate is a fee, calculated as a percentage of the total loan +amount, which you are charged for borrowing money. Most lenders refer to this as a base rate.
When you take out a loan the lender calculates interest on a sliding scale. This figure is then used to work out what your monthly repayments will be.
Here’s a quick example:
You borrow £1,000 with an APR of 10% over 3 years (annual APR calculation)
Year 1 interest: 1,000 x 0.10 = 100 + 1,000 = 1,100
Year 2 interest: 1,100 x 0.10 = 110 + 1,100 = 1,210
Year 3 interest: 1,210 x 0.10 = 121 + 1,210 = 1,331
In total, you’ll pay back £1,331 at the end of the finance period.
Note: Advertised APR figures are normally higher than the advertised interest rate because lenders bundle additional costs and fees into the rate shown. For peace of mind, and to ensure you know what you’re going to pay, ask your lender exactly what fees are included in the APR figure they offer you.
Tips: Watch out for dealers that mash 3-year warranties or other extras into the selling price of the car.
For example, if you were buying a Ford Focus for £6000 they might add a 3-year warranty on top of the price that cost £495
Now you’d be borrowing £6495 and be paying interest on top of that warranty price. It’s great for the dealer (they’ll be making money on the warranty as well) but not for you. Take a good look at the starting price; it must be identical to the price you’re paying for the car.
Another Tip: Sure you need to buy a finance package that’s affordable for you over the long term, but consider the period over which you borrow. If you borrow £6,000 over 4 years you’ll be paying considerably more interest than you would if you took the package over 3 years. Give this some thought before signing on the dotted line.
One More Tip: Find out what the “early settlement fees” are with the lending company. Usually, an early settlement will incur some kind of penalty. It might be an additional one month’s payment or a fixed fee of £150. It differs from one company to another. The important thing for you is to fully grasp what you are buying before you commit.
My last Tip: Ask yourself what the car will be worth once you’ve paid it off. It can be a little disheartening to be paying £189 a month loan repayments for a car that’s lost practically all of its value.
If you have a very good credit rating you can negotiate interest rates with finance companies. One way to do this is by approaching your bank (no need to actually apply as too many credit applications in a short space of time can have an adverse effect on your credit rating) and asking how much their APR rate will be on a similar loan amount.
If the bank rate is less than that quoted by the car dealer and the finance company you can simply insist that they beat it!
The finance company definitely want your business, especially if your credit rating is good. If they think they’re gonna lose your business to a high street bank, I assure you they will better your bank rate of interest. This is a little inside secret the motor trade and car finance company don’t want you to know.
Step 5 – Finalise the deal
Once you’ve been accepted and have provided all your documentation it’s time to pay your deposit, sign the agreement and drive away.
Hope you’ve found this article useful in your pursuit of finding an affordable used car with Hire Purchase.
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