Hire purchase (HP) agreements are one of the most popular ways to buy a new car. It’s a finance agreement rather than a lease, and once the contract has ended, you’ll have the option to purchase the vehicle. Payments are spread out over a period of time, rather than a large sum being paid upfront.
While an HP sounds good in theory, it can sometimes be problematic in practice. Cases of HP mis-selling are on the rise, and it seems likely that the situation might be the next big financial scandal.
If you’ve recently taken out a hire purchase agreement, it’s important to make sure you weren’t mis-sold to. If you were, you may be able to seek compensation. Here’s more information
- What is a HP?
- How Does a PCP work?
- What are the differences between HP and PCP?
- What if financial mis-selling?
- How is a HP mis-sold?
- Mis-selling HP as PCP
- What to do if you have been mis-sold HP
What is a Hire Purchase (HP)?
A HP is a popular way to finance the purchase of a car. HP is similar to Personal Contract Purchase (PCP) in the fact that you make monthly payments towards the loan and don’t retain any ownership rights to the vehicle until the final option to purchase (OTP) fee is paid. The key thing to note is that it isn’t a lease arrangement. The vehicle is entirely yours at the end of the contract, providing you’ve met all your monthly payment and kept to the other terms of the agreement.
Like a PCP, you will have to make a final payment at the end, in order to obtain ownership of the car. This OTP fee is often vastly lower than the final payment on a PCP as you will have made larger monthly payments to cover the true cost of the vehicle price, not just the depreciation. However, the monthly payments are usually higher, because you’re paying off the cost of the vehicle, not just the depreciation. This can make a big difference in terms of affordability.
So, what’s the problem with using HP to purchase a new car? Unfortunately, some HP agreements are sold to customers as PCP agreements, even when it may not have been suitable to do so. The mis-selling of PCP or HP is entirely dependent on your circumstances and needs, as explained in an example further below
The approximate number of cars purchased using finance options in the UK, in 2018.
The amount of people (according to a 2018 survey) who weren’t sure how much money they’d borrowed to finance the purchase of their car.
4% to 8%
The typical APR interest rate that customers pay as part of their HP agreement.
How Does Hire Purchase Work (HP)?
A step-by-step guide
This is how HP works, stage by stage:
1) Selecting a HP deal
When looking to purchase a car, the dealer or broker will often go through a range of options. This will look at things such as what type of vehicle you are after, your budget and what you want out of a contract – for example, if you want to own the car at the end or switch cars once the contract is over.
2) Performing relevant checks
As with any loan, the lender will carry out a credit check before approving you for HP. This is to make sure that you’ll be able to keep up with the monthly payments. However, it’s always recommended that you assess your financial situation independently too, as these payments will make a dent in your salary. Bear in mind too that credit goes on your record – too many credit agreements, and your rating could be adversely affected.
3) Paying a deposit
If you’re approved for HP, you’ll likely pay an initial deposit. Generally speaking, this is 10% of the car’s value. Some dealerships (i.e. those who only sell one make of car) may offer a contribution to this, which is typically between £500 and £2,000.
4) Valuing the vehicle
Next, the lender will calculate what the car is currently worth (taking into account age, mileage and condition). This figure will guide the lender as to how much money they can lend against the vehicle. This is referred to as the ‘loan to value’ of the vehicle. In typical cases, you could be lent as much as 125% of the vehicle’s value, leaving you with negative equity if you wish to trade the vehicle in before the end of agreement.
5) Monthly payments
All you need to do for the duration of the loan is keep up with the agreed monthly payments. Be aware, these include interest, which can range up to as high as 40% APR depending on your credit file.
As you’re essentially just hiring the vehicle, there are some restrictions in place. For example, you will not be the lawful owner of the vehicle until you have fully repaid the finance, plus any option to purchase fee.
7) Options at the end of the contract
When the agreement ends, you’ve essentially got two options:
a) Pay the option to purchase fee and own the vehicle outright
b) Trade the vehicle in where its current value will be used as a deposit for your next agreement
How does a HP work in practice?
Here is an example of a HP in action:
Mr Jones wants to buy a car priced at £12,000, and he’d like to take out a HP agreement to purchase it. He pays an initial deposit of 10%, which is £1,200. This means he has £10,800 left to pay.
The HP contract lasts for three years and the APR is 5%. Mr Jones will need to pay an agreed sum of money each month to pay off the amount he owes, which will include the added interest.
At the end of the contract, he can buy the car, by paying a small transfer fee. It’s important to note that prior to this, he doesn’t own the car (and has no legal right to sell it).
Benefits and Drawbacks of a HP Agreement
- You spread the purchase cost of the vehicle over a period of 3 to 5 years typically.
- You’ll own the vehicle after paying the last instalment.
- The interest rate on hire purchases is fixed for the duration of the agreement.
- You can choose the term and deposit amount which reflects your circumstances and budget.
- A great choice if you want to own the vehicle outright at the end of the agreement without any large balloon payments
- The loan is secured against the vehicle so can be repossessed if payments are not kept up.
- Non-payment can negatively affect your credit rating.
- The finance company are the legal owners of the vehicle until the agreement is paid in full and you have paid your option to purchase fee.
- Repayments will include interest charges, and the car will cost more overall than the original sale price.
- The rate of interest will reflect the level of risk to the lender. A history of poor credit will represent higher risk and a higher rate will be charged.
What are the differences between PCP and HP?
What is a PCP?
A PCP is another popular way to finance the purchase of a car. It works in a similar way to a hire purchase agreement; you pay with an initial deposit, then a series of monthly payments for a set period. Contracts usually last between two and five years. However, the monthly payments don’t cover the value of the car. What you’re paying off is the depreciation of the vehicle – the difference in the car’s value, from when you purchase it, to when the contract finishes, plus interest. So, if the difference in a car’s value from when you purchase it, to when the contract is finished is £4,000 – that is what you will pay in total, plus interest. That’s what makes the monthly costs typically far cheaper than other types of car financing like HP.
PCP agreements are ideal for customers who enjoy regularly changing their car for a newer model without having to worry about negative equity. However, you will have an agreed mileage limit you must operate within in order for the guaranteed future value to be valid at the end of the agreement. If you exceed the agreed limit, you will be charged for every mile you drive above it. These charges can vary from 3p to as much as 72p per mile. To put that into perspective, driving just 1,000 miles per year more than you signed up for over three years at a 72p per mile charge could see you hit with more than £2,000 in charges.
HP agreements are ideal for customers who want to own their vehicle at the end of the agreement or are purchasing collectable or classic cars with strong residual values, such as limited production models. Unlike a PCP, there is no mileage limit on the vehicle at the end of the agreement, allowing more flexibility in the use of the vehicle. You will also typically pay more per month on HP than a standard PCP as you are paying more than just the depreciation of the vehicle.
Many HP agreements will carry an option to purchase fee in order to take ownership of the vehicle. You will not be given a guaranteed future value when you acquire the HP so you will be liable to pay the agreed final payment regardless of the vehicle’s value. Although the Financial Conduct Authority give lenders guidance on how high this charge can be, there are no set limits and can often be unjustly high.
To find more about Hire Purchase (HP) and how a HP agreement is mis-sold, visit our PCP mis-selling guide
What is financial mis-selling?
What is financial mis-selling?
In its broadest terms, financial mis-selling is said to have occurred if:
- The dealer failed to explain the deal properly to you
- They offered you a loan that wasn’t appropriate for your specific requirements
- They didn’t present you with the full range of options
- They didn’t talk you through any of the extra fees etc.
- They didn’t go through the risks associated with the loan
Financial mis-selling is a serious issue, and cases are on the rise. Sadly, this is particularly the case with HPs. As such, it’s important to identify whether or not you were mis-sold to, and to take action if you were.
How is a HP mis-sold?
Here are some examples of how you might have been mis-sold HP:
1) You were told it was a better deal for you, when it wasn’t.
With HPs, you will often pay more per month for your vehicle as you are financing more than just the depreciation. If the dealer didn’t explain this to you, you could end up paying more overall by the end of the agreement than you may have done on a PCP.
2) The loan wasn’t explained properly.
In their recent investigations, the FCA found that many dealerships weren’t adequately explaining the details of the contract. This meant that consumers were signing up for a loan without being fully aware of the terms and conditions. Another common complaint is consumers mistakenly believing that they own the car, because the nature of the agreement hasn’t been explained to them properly.
3) You were offered a deal that benefitted the dealer more than you.
The FCA found that some dealership commission arrangements incentivised staff to favour loans with higher interest rates. This may not benefit the consumer, which means it’s a clear-cut case of mis-selling.
4) You were offered an add-on that you didn’t need.
Some dealers offer additional products (such as insurance) to their customers. These products may be of no real benefit, and only sold to you to generate additional profit for the dealership.
Mis-selling HP as PCP
Many customers are unknowingly being sold HPs under the guise of PCP. This causes huge issues for customers when it comes to ending the agreement. Where PCP customers are given a guaranteed future value to offset the optional final purchase fee, HP customers are being stung with high fees to buy the vehicle and may be financially disadvantaged when trading their vehicle in part exchange.
Here is an example of how an unsuitable HP agreement may disadvantage a customer:
Mrs Smith acquires a HP agreement to purchase a vehicle for £15,000 over a 4 year term. She agrees to the terms and pays every month for the next 4 years, when she eventually wants to change her vehicle. As HP has no guaranteed future value, Mrs Smith will only receive a part exchange value that the dealership deems the vehicle to be worth at that time. In this case, her vehicle may have depreciated £10,000 over the last 4 years and is now only worth £5,000 when traded against a new car. If she had bought her vehicle on a PCP agreement, the lender may have anticipated the depreciation of the vehicle to be only £8,000, leading to a part exchange value of £7,000. This means that Mrs Smith would have effectively been £2,000 better off if she had taken a PCP agreement.
What to do if you have been mis-sold HP
Firstly, it’s important to identify exactly what you think the dealer has done wrong. Gather any evidence that you have (for example, written correspondence like an email), as this can be used to support your case. The contract itself is another useful document, especially if your actual experience of the HP differs considerably to what’s written on paper.
If you don’t have solid evidence, don’t panic, as you may still have a case.
Some people choose to lodge a formal complaint with their dealer. Most dealerships have an official complaints procedure, and you might be able to come to a satisfactory resolution. However, if their response is inadequate, it’s time to take things further.
Goodwin Barrett are experts in claiming compensation for victims of mis-selling. Over the years, we’ve helped thousands of people to claim back money, and we’re here to fight against unscrupulous lenders.
It’s a simple process – just get in touch, and one of our team will get back to you swiftly to discuss the matter further. You can call us on 0808 163 1659 or request a call-back by completing our online form.