Hire purchase is the third most popular form of car leasing. It mixes the pros of personal contract hire and standard purchase deal, by allowing you to take ownership of the leased vehicle when you make the final payment. It is somewhat complex, compared to the other types of leasing, so it is recommended to read the contract carefully. This guide will explain the basics, though.
Hire purchase is a contract which begins with paying an initial deposit (which varies from 10% to 50% of the car’s value) and then continues like a normal car lease, with regular monthly payments, which, however in this case, cover the rest of the car’s value. When the lease period is over, the car becomes you private possession. So in case of hire purchase monthly payments are not calculated on the basis of the difference between car’s retail value and its estimated value at the end of the lease term, but only its retail value is taken into consideration. Another difference between hire purchase and other forms of car leasing is the fact, that the lessor is usually not the dealership. In fact, most of hire purchase deals are signed between lessees and the lenders (who are usually banks or other financial institutions), but arranged by the dealers. This is how it works: the lender buys the vehicle from the dealer and lets you use it in exchange for monthly payments and the initial deposit. Until the contract is over, the car is not yours, but when it ends, you take the car’s ownership.
The main advantage of such a complex way of financing a vehicle is the fact that it allows you to buy a car that would normally be out of your reach. It is also a better option than just lending money to buy a car, because there is no need to secure the loan somehow – the car you lease provides enough security. It results in much better interest rates, than in case of bank loans. In fact, if you decide for a high initial payment, you may get a 0% finance deal.
Hire purchase is an option only for financially stable people, though. If you do not keep up with the payments, the lender will have a right to repossess the car and you will not only loose it, but also all the money you have already paid in form of monthly instalments.
Hire purchase is a perfect form of financing a brand new car for those people, who want to drive their dream cars before they can actually afford it, but are in a stable financial situation and are sure that they can keep up with the payments.