Hire purchase

What Is Hire Purchase?

Hire Purchase (HP) is a financing arrangement under the broader category of Consumer Finance. It allows an individual or business to acquire and use an asset immediately by making a series of fixed payments over an agreed period. Unlike an outright purchase, the buyer does not gain legal ownership of the goods until all installments, including any final fees, have been paid. Until then, the finance company remains the legal owner of the item⁶¹, ⁶², ⁶³. Hire purchase agreements are a common form of credit agreement and typically involve an initial deposit followed by regular monthly repayments, which include interest rates⁵⁹, ⁶⁰.

History and Origin

The concept of hire purchase emerged in the United Kingdom during the 19th century, designed to enable consumers to acquire expensive goods they might otherwise be unable to afford outright. It became particularly popular for household appliances and furniture in the early to mid-20th century⁵⁸. The system gained significant traction in the automotive industry in the 1930s, allowing buyers to drive new cars by paying an initial deposit and committing to fixed monthly repayments⁵⁷.

However, the practice was initially unregulated, leading to some lenders charging excessive rates and imposing harsh terms, including the swift repossession of goods with little notice⁵⁵, ⁵⁶. This led to the introduction of the Hire-Purchase Act in 1938, championed by Labour MP Ellen Wilkinson. This landmark legislation sought to protect consumers by requiring lenders to clearly state the purchase price and installment amounts and restricting their ability to repossess goods without notice, especially after a certain portion of the price had been paid⁵², ⁵³, ⁵⁴.

Key Takeaways

• Hire purchase allows immediate use of an asset while paying for it over time.
• Legal ownership of the asset transfers to the buyer only after the final payment is made⁴⁹, ⁵⁰, ⁵¹.
• Payments are typically fixed monthly installments that include interest⁴⁸.
• HP agreements are common for significant purchases like vehicles and machinery⁴⁷.
• Failure to make payments can result in the repossession of the goods and potential negative impacts on one's credit rating⁴⁵, ⁴⁶.

Interpreting the Hire Purchase

A hire purchase agreement is interpreted as a conditional sale. The agreement details the total cost of the item, including interest, the amount of the initial deposit, the number and frequency of installments, and any associated fees. Understanding these terms is crucial because the buyer does not own the goods until the very last payment is made. This means that, until full payment, the goods serve as collateral for the finance company⁴⁴. The terms also stipulate the buyer's responsibilities for maintaining the goods during the repayment period⁴³.

Hypothetical Example

Consider Sarah, who wants to buy a new car priced at £20,000 but doesn't want to pay the full amount upfront. She opts for a hire purchase agreement with a finance company.

1. Deposit: Sarah pays an initial deposit of £2,000.
2. Financed Amount: The remaining £18,000 is financed.
3. Terms: The agreement is for 48 months (4 years) with an annual interest rate, resulting in monthly payments of £450.
4. Total Repayable: Over 48 months, Sarah will pay £2,000 (deposit) + (48 months * £450/month) = £2,000 + £21,600 = £23,600.
5. Ownership: Sarah takes immediate possession of the car. However, the finance company holds legal ownership until she makes her 48th and final payment. If she were to miss payments and default on the agreement, the finance company could repossess the vehicle, subject to relevant regulations.

Practical Applications

Hire purchase is widely used for acquiring high-value tangible assets where outright cash payment is not feasible or preferred. Its most prominent application is in the automotive sector, where a significant portion of both new and used car sales are facilitated through HP agreements. This al⁴¹, ⁴²lows individuals and businesses to access transportation without a large upfront capital outlay.

Beyond⁴⁰ vehicles, HP is also utilized for purchasing machinery, equipment for businesses, and even expensive consumer electronics or furniture. The fixed nature of the fixed payments makes budgeting predictable for the borrower. According to data from the Bank of England, consumer borrowing, including that for car dealership finance, is a notable component of overall consumer credit in the UK economy.

Lim³⁷, ³⁸, ³⁹itations and Criticisms

While beneficial for acquiring assets, hire purchase agreements come with limitations. A primary drawback is that the total cost of the item typically exceeds its cash price due to the added interest rates and potential fees. Crucial³⁵, ³⁶ly, until the final payment is made, the borrower does not own the asset. This me³³, ³⁴ans they cannot sell the goods or use them as collateral for other loans without the finance company's explicit permission.

If a b³⁰, ³¹, ³²orrower struggles to meet their fixed payments, they risk the repossession of the goods, especially if less than one-third of the total amount payable has been paid under a regulated agreement. Such a ²⁸, ²⁹default can severely damage an individual's credit rating, making it harder to obtain credit in the future. Consume²⁶, ²⁷rs with unresolved complaints regarding hire purchase agreements can escalate their concerns to the Financial Ombudsman Service, which aims to settle disputes between consumers and UK-based financial service providers. The Fin²⁴, ²⁵ancial Conduct Authority (FCA) also provides guidance on regulated credit agreement terms, including those for hire purchase.

Hir²¹, ²², ²³e Purchase vs. Personal Contract Purchase (PCP)

Hire Purchase (HP) and Personal Contract Purchase (PCP) are both popular forms of car finance, but they differ fundamentally in terms of ownership and the end of the contract.

With Hire Purchase, the path to ownership is clear and automatic upon the final payment. The monthly payments are effectively paying off the entire value of the vehicle over the term. There i¹⁹, ²⁰s no large final payment (often called a balloon payment) required to own the car at the end of the agreement.

In contrast, Personal Contract Purchase (PCP) involves lower monthly payments because the borrower is essentially financing the depreciation of the vehicle over the term, not its full purchase price. At the ¹⁸end of the PCP agreement, the borrower typically has three options: make a large final balloon payment to own the car, return the car, or use any accumulated equity towards a new PCP agreement. Therefo¹⁷re, with PCP, ownership is not guaranteed unless the final balloon payment is made, whereas with Hire Purchase, ownership is the predetermined outcome upon completion of all payments.

FAQs

Is a deposit always required for Hire Purchase?

Most hire purchase agreements require an initial deposit, typically a percentage of the item's price, though the exact amount can vary depending on the lender and the specific circumstances.

Ca¹⁵, ¹⁶n I end a Hire Purchase agreement early?

Yes, typically you have the right to terminate a hire purchase agreement early. However, you might still be liable to pay a portion of the outstanding balance, often up to 50% of the total hire purchase price, or any arrears. It's cr¹², ¹³, ¹⁴ucial to check the terms of your specific contract for details on early settlement.

Wh¹¹at happens if I miss a payment?

Missing a payment on a hire purchase agreement means you are in default of your credit agreement. The finance company can take steps to recover the money, which may include repossessing the goods, especially if you have paid less than one-third of the total amount. This ca⁸, ⁹, ¹⁰n also negatively impact your credit rating. If you ⁶, ⁷are struggling to make payments, it is often advisable to contact the finance company or seek debt advice.

Do⁵ I own the item during the Hire Purchase agreement?

No, you do not legally own the item until you have made all the scheduled payments and fulfilled all the conditions of the hire purchase agreement, including any option to purchase fee. Until t³, ⁴hen, the finance company retains legal ownership.¹, ²