There are many different types of loans. If you’re short on cash but need an expensive item like a new car or laptop, then hire a car might be a solution to consider. We explain what a hire purchase agreement is, why you want one, and what to look for.
What is a hire purchase contract?
A hire purchase agreement is a form of borrowing where you don’t own the item itself, but rent it out instead. It is a popular auto finance option for those who cannot afford to purchase a car.
In hire-purchase, you pay an agreed number of installments to hire the item (such as a car or laptop) for a set period of time. During the agreement, you will not own the item. Instead, once you reach the end of your contract, you will have the option to purchase it. If you decide to do so, then the article will be yours.
Lease-purchase contracts generally last between one and five years. The most common duration of such an agreement is three years. Because you don’t own the item, the lender can repossess it if you are behind on your payments. Likewise, you cannot sell or dispose of the item without permission from the lender. This is because technically it is not yours until you have made your final payment.
Why take out a hire purchase contract?
There are several advantages to taking the hire-purchase route. It could give you access to something that you couldn’t otherwise afford to buy. And this can often be an easier way to access funds if your credit rating is less than flawless. We’ll take a look:
- Low deposit – If you are struggling to find a decent deposit for another form of loan, then hire purchase might be a good option. Under a hire purchase agreement for a car, you will usually only have to deposit 10% of the value of the car.
- Flexible payment terms – You can choose a term of office that suits your monthly budget. So if you need low monthly payments, longer term can reduce monthly payments. However, keep in mind that the longer the term, the higher the overall cost, as you will end up paying more interest.
- Easier to get with a lower credit score – Since the item you are renting is used as collateral, if your credit score is not impeccable, it may be easier for you to secure a hire purchase. Lenders will be a little more confident in lending you because they know they can repossess the property if you fail to make your payments.
- No mileage restriction – If you buy a car, unlike a PCP contract, a hire purchase agreement has no mileage restrictions. Therefore, you don’t have to worry about paying extra fees at the end of the term.
What are the disadvantages ?
Nothing is perfect. And while a hire purchase agreement may work for some, it won’t work for others. Here are a few things to remember:
- Ownership – The main thing to remember with a hire purchase agreement is that you do not own the item. You cannot therefore sell it or make changes to it during the term of your contract. And above all, it can be taken back if you do not respect your monthly payments. While with a Personal loan, you will still have to repay the loan, but you will immediately become the owner of the object.
- Higher monthly payments – If you buy a car, you can expect your monthly payments to be higher with a hire purchase than if you opt for PCP.
- Expensive short term option – If you only want a short-term contract, you will find hire-purchase to be quite expensive.
To take with
There are many auto financing options available, of which hire-purchase is only one. If you’re looking to fund new wheels, think about the arrangement you’ll be comfortable with.
If you’re happy to have something on loan, then hire a purchase might be a way to get you on the road. But if you prefer to own the car yourself, then maybe explore the idea of a 0% credit card purchases or an unsecured personal loan.
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