There are many car finance options for drivers to help spread the cost of getting a new car. Car finance allows you to lend money to get the car you want and pay for it over a term that suits you. You will make monthly payments tailored to your budget till the end of an agreed finance term. One of the most popular ways to finance a car in the UK is through hire purchase which is a form of secured finance and can be offered by many finance lenders. Hire purchase can be a suitable option for those with bad credit too or people who may struggle with approval from a mainstream lender. The guide below looks at hire purchase in more detail and how it could benefit bad credit applicants.
How does hire purchase work?
Hire purchase is one of the most straightforward car finance agreements you can get. Its a form of secured loan which means the money you borrow from the lender is secured against the car you get. You make monthly payments with interest back to the lender until the end of an agreed term. The value of your chosen car is spread into equal monthly payments so choosing an expensive car can make your monthly payments higher. Hire purchase deals tend to work best on used cars as they usually always have a lower purchase price than brand-new cars. Once your finance term has come to an end and all payments have been made on time and in full, there is one final option to purchase fee to pay. This fee is usually similar to what you have been paying each month and means you can take ownership of the car from the lender and the car is yours to keep!
Is hire purchase good for bad credit?
Other car financing deals such as personal loans or PCP usually reserve their best interest rates for people with the best credit scores as they are less of a risk to lend to. You may struggle to get accepted for car finance when you have a poor credit history as you’re more likely to default on future loans based on your previous evidence of borrowing. Hire purchase can be more accessible for bad credit than other options because it’s a secured loan. This means the ownership of the vehicle lies with the lender throughout the agreement and if you fail to repay, the lender has the right to use the car as collateral and take the car off you. You should only enter into a credit agreement that you can afford to pay back as failing to repay can lead to serious financial consequences.
Benefits of hire purchase:
Not only do drivers like hire purchase because it could be a bad credit-friendly car finance option but there are also other benefits too.
- Hire purchase is a flexible form of finance where the monthly payment and term length can be adjusted to fit in with the affordability of the customer.
- The deal usually benefits from both a fixed term and a fixed interest rate which means your payments won’t change during your agreement loan.
- There are fewer restrictions with hire purchase, and you won’t need to set an agreed mileage or have to pay any additional damage charges at the end of the agreement.
- You can own the car at the end of the agreement.
Disadvantages of hire purchase car finance:
Whilst there are so many benefits of using hire purchase for a car, it wouldn’t be fair to not also look at the drawbacks too.
- The loan is secured against the car which means if you fail to pay, the car can be taken away from you.
- Monthly payment scan be higher than other options such as PCP as you are spreading the full value of the car with interest into equal monthly payments. PCP on the other hand benefits from lower monthly payments as much of the cost of the car is differed until a final balloon payment which only needs to be paid fi you wish to keep the car.
- Usually the most cost-effective HP deals are spread over 3-5 years, and it may not be the best options for you if you’re looking for a short loan term.