HIRE PURCHASE - HP

HP is a traditional and straightforward way to finance a new car

• HP is simply a loan secured against the car
• There's no mileage contract
• It's ideal if you want to own the car at end of contract

Hire Purchase (HP) is the traditional way to finance a car purchase. You pay off the entire price of the vehicle through a series of monthly payments. At the end of the contract period the vehicle becomes your property. It therefore suits people who tend not to change their cars too often.

The monthly payment is determined by the amount of deposit paid, the period of the contract and the sale price of the vehicle.

HP is very similar to borrowing a sum of money from a bank and paying it back over a fixed period of time, with interest. Hire purchase is a type of secured loan which are often preferred over alternative (unsecured) loans because they allow a greater borrowing limit. The term "secured loan" means exactly that, a loan that the lender can secure against an asset (in this case, a car).

HP is also very easy to calculate. All you need to know is:

· How much you want to borrow

· How long you want to borrow it over (anywhere between 12 – 60 months)

· What the FLAT rate of interest you are being charged. (NOT the APR)

If you know these 3 things, it’s easy to calculate.

Let’s say you wanted to borrow £10,000 over 5 years, at a flat interest rate of 5% per annum.

You’ll be paying 5 % per annum for 5 years, which means you’ll pay 25% interest over the full 5 years (5% x 5 years = 25%)

So if we multiply the £10,000 by 25% we’ll get the amount of interest, namely £2,500

Since you repay both the interest and the capital, that means you’ve got £12,500 to pay back in total. You are paying it over 5 years, so with 12 months in a year then that’s 60 monthly payments.

So if you divide the £12,500 by the 60 monthly payments you’ll get £208.33 per month!

Most loans will include an acceptance fee on the 1^st and last payments. It’s worth asking what these are (as the can be £150+ in some cases!). The above calculation does not take these into account (but the APR will). Some companies will allow you to spread the cost of these fees equally over the payments, which will throw the above calculation out by one or two pounds, but nothing more. Make sure you ask about these fees, although any GOOD salesperson / Business Manager will advise you of them at the time. Always worth checking though!

WANT TO LOWER YOUR MONTHLY PAYMENTS?

• Consider financing the car over a longer contract period - perhaps a 60 month contract will make your car of choice more affordable. Be careful here though; most Finance Houses will insist on a 0.5% flat rate increase for any business written in excess of 48 months. If you do need a 60 month deal, be sure to compare it with a PCP.
• The amount of deposit you are able to put down will dramatically effect your monthly payments. Higher deposit means lower payments
• The age of the car will also typically affect the flat rate you get charged, as car lending finance houses tend to give a lower flat rate for cars under 3 years old than they do for those in the 3-5 year old bracket, with a further jump after that.