What is a hire purchase agreement for a car?

Hire purchase agreements

A hire purchase agreement is a means of buying a car on finance; ie, you are provided with the car but legal title to it remains with the seller until you finish making the repayments.

With a hire purchase agreement, you’re required to pay a deposit initially and then a fixed amount for an agreed number of months. Once you have paid the entire amount you will own the title to the car.

When is a hire purchase arrangement available?

You can buy both new and used cars through a hire purchase agreement, although older used cars are often excluded from hire purchase agreements as their value will be too low by the time the loan comes to an end.

Advantages and disadvantages

A hire purchase agreement is easy to obtain and straightforward to use and in many cases is cheaper than other types of loan.

The two main disadvantages of using this method to purchase a car are that:

  • the car remains the property of the lender until the agreement ends. This means you can’t sell the car without obtaining permission before the agreement ends;
  • if you fall behind on your payments, the lender can repossess your car and sell it cheaply at auction, suing you for whatever is still owed, plus the additional costs they incurred.

Are there any other options available to me to purchase a car?

Other than a hire purchase agreement there are two other options available to help you purchase a new car. They are:

  • a normal unsecured loan;
  • a personal contract purchase.

Normal unsecured loan

With a normal unsecured loan, you obtain the money in advance to obtain the goods then repay the debt in monthly installments. A normal unsecured loan is available from banks, building societies and finance companies, although often lenders will only provide such a loan to homeowners who have sound finance.

Personal contract purchase

With personal contract purchase (also known as a personal contract plan), you initially pay a deposit of up to 20% of the total then an agreed number of monthly repayments for up to three years. Following the agreed period, a final balloon payment of the difference must be paid.

Although this method offers cheaper monthly payments and a convenient way of funding a new car every three years, it is often more costly in the long run than hire purchase and it is difficult to sell the car.

Potential issues of hire purchase agreements

Having entered into a hire purchase agreement, there are a variety of issues which may arise:

  • you do not wish to continue with the agreement;
  • you have defaulted on your payments;
  • you wish to sell the car.

You do not wish to continue with the agreement

Under the Consumer Credit Act 1974 (as amended), if you’ve paid more than half of the total amount owed you should be able to return the vehicle without any legal consequences.

If you’re not yet halfway through the payments, you’ll need to pay the amount outstanding to reach the halfway point before you can get out of the agreement.

If you’re not sure how much you owe, check the original credit agreement which will outline the full cost of the goods and how much you must pay if you end the agreement.

You have defaulted on your payments

The general rule is that if you have fallen behind on your payments and you have paid less than one-third of the total repayments, the hire purchase company can repossess the goods without a court order.

The hire purchase company will issue you with a pre-possession order which will give you 15 days notice before it is repossessed.

The hire purchase company will have to take you to court to regain possession of the vehicle if you have made more than one-third of the payments unless you consent to the repossession.

You wish to sell the car

It is against the law to sell a car which is still the subject of a hire purchase agreement. If you wish to sell the car you must ensure you have squared everything with the hire purchase company.

A buyer of a car, which is still subject to a hire purchase agreement, will get good title to the car if:

  • the buyer did not know that the car was under hire purchase and was therefore buying the car in good faith believing the seller had the right to sell it;
  • the buyer is a private buyer and not a dealer or a finance company.