Potential issues of hire purchase agreements

So maybe you have found your dream car, and you want to purchase it on finance. There are many different types of funding options available; it can become confusing when it comes to choosing which type of finance is best for you and your current financial status.

What is a Hire Purchase Agreement?

A hire purchase agreement is a financial agreement between yourself and a finance company. The agreement shows that you are leasing the item that you are purchasing. You will agree to pay a fixed price, usually monthly, over a certain amount of time. You will also typically pay all VAT on the item upfront. 

By using this method of finance, it means you are not allowed to sell or dispose of the purchased item. The finance lender legally retains ownership of the item until the option is given to you at the end of the agreement term to buy the item in full. 

Once the finance company has received this optional final payment, the finance company will then pass over ownership to yourself. If you decide not to pay the final optional amount, you must return the item to the finance company.

What are the benefits of hire purchase agreements?

There are many benefits to choosing a hire purchase agreement over other finance options, for example:

• Instead of paying one large lump sum, you can spread the purchase cost of high-value items. These include items such as cars, which you can typically pay over three to five years.
• As the purchaser, you will own the item after paying the optional final instalment which can make it appear more of an attractive offer to a lease.
• If you do not want to keep the car and want to get a new one after your agreement term has ended, you can hand the car back and take out another hire purchase agreement if you so wish.
• You will be able to use the item as soon as the agreement has been signed off, instead of waiting until you have saved up to pay it in full.
• Hire purchase is a more comfortable way of financing, and it is generally easier to obtain.
• Interest rates on hire purchases are fixed for the term of the agreement. If any changes by the Bank of England are made to the base interest rate, it will stay the same.
• When considering the advantages of hire purchases, one of them is that you can typically choose from a fixed term and a deposit amount. This can be easier to manage depending on your circumstances and budget.

What are the disadvantages of hire purchase agreements?

Although there are many positives to hiring purchase agreements, there are sadly many negatives too. It is up to you to decide whether the positives outweigh the negatives for you.

• Hire purchase agreements are usually fixed, so if you were to find yourself in financial difficulty during your agreement term. The finance company could repossess the item, and this will also cause damage to your credit rating.
• You will end up paying more for the item you are financing if you choose to do it through hire purchase.
• You will not have legal ownership of the item until you have made the final optional hire purchase payment. Therefore the finance company has the right to repossess should you stop paying.
• Because you will not have legal ownership of the item, it will not be protected if you were to become bankrupt. It is technically still under the legal ownership of the finance company during the agreement term.
• The term of most hire purchase agreements can be quite long – and can last anywhere between three and five years. If it is for a car, that is a reasonable length for a hire purchase agreement. However, if you are considering choosing a hire purchase for a different kind of item, you should think whether there is any benefit to spreading the cost of the item out for that long.
• Hire purchase agreements do not come cheap. As with all forms of financing, you will be expected to pay a fee for spreading the cost. Most hire purchase schemes can prove to be quite costly in the long run.
• If you are buying an item like a car and it gets stolen or damaged before you have fully paid for it, insurance coverage may not cover the replacement value of it. Unfortunately, this means you could face a shortfall. Something called “gap insurance” can be sorted to cover a situation like this but will begin to make things quite costly.

So what about your credit score?

If you are considering taking out any loan or form of financing, it is highly recommended that you have a good credit score. Credit lenders need to make sure that they can trust you to pay monthly finance payments, as failure to pay can lead to your hire purchase item being repossessed.

If you do have a poor credit score and get rejected for finance, this will still show up on your credit file as a failed credit application. That is not to say you will never be accepted for finance. 

Sometimes finance companies may accept a guarantor if you have poor credit, but this is more likely if you were to take out a loan to fund the cost of the car upfront. A guarantor is a person who agrees to front up the monthly payments should you become unable to pay them, however, this is a risk to the guarantor if their financial situation changes as they could have items repossessed if they were unable to pay.

You may have to find a credit lender who explicitly accepts purchasers with poor credit scores; you will typically find that these sorts of companies will have much higher APR rates. For example, usually a hire purchase agreement for a car with a value of £18,000, you may only pay 5% APR on top of the cost of the vehicle. In contrast, a company that caters to those with poor credit may have APR rates of anything between 20%-45% APR which means you may end up paying nearly double the cost of the car if you wanted to use a finance option.

If you feel that you have been misguided, our consumer rights solicitors can advise you on all issues to do with consumer disputes to help resolve your issue as efficiently as possible.