Hire Purchase Explained

How HP works

Hire Purchase is a secured loan tied to the car. You pay a deposit upfront, then fixed monthly payments over a set term. No balloon. No optional final payment. When the last payment clears, the car is yours.

The finance company owns the car during the agreement. You're hiring it while you pay — hence the name. That's the key difference from a personal loan, where you own the car from day one. With HP, ownership transfers at the end, not the start.

Terms typically run 24 to 60 months. Deposits are usually 10% of the car's value, though you can put more in. The more you put down, the less you borrow, the less interest you pay. Simple arithmetic, but worth saying plainly.

Typical HP rates

Manufacturer HP deals on new cars run 3-7% APR. Broker deals through a dealer forecourt on used cars typically run 8-15% APR. The rate you're offered depends on your credit score, the age of the car, and how competitive the lender needs to be to win your business.

For comparison, the Bank of England's average personal loan rate in March 2026 was 4.1% APR. If you've got decent credit and you're borrowing £15,000 or more, you should be testing whether a bank loan beats the HP rate before you sign anything.

The one-third rule

This one matters. Under the Consumer Credit Act 1974, once you've paid at least one-third of the total amount payable, the lender cannot repossess the car without a court order. Before you hit a third, they can take it back without going to court.

Say you're borrowing £18,000 over 48 months. The total amount payable including interest might be £21,000. One-third of that is £7,000. Once your payments total £7,000, you have that protection. If you miss payments before that point, the lender's position is much stronger.

It doesn't mean you should miss payments. It means you should know where you stand legally if circumstances change.

Section 75 doesn't apply

A common misconception. Section 75 of the Consumer Credit Act protects you when you buy goods costing £100-£30,000 using a credit card. The credit card company becomes jointly liable if the seller fails to deliver or the goods are faulty.

HP is a different beast. It's a credit agreement between you and the finance company, not a credit card transaction. Section 75 doesn't apply. The protections you have are under the Consumer Credit Act and the Consumer Rights Act — still meaningful, but different.

Voluntary termination

Section 99 of the Consumer Credit Act gives you the right to hand back the car and walk away once you've paid 50% of the total amount payable. This is called voluntary termination, or VT.

With HP, it's more straightforward than PCP. There's no balloon complicating the calculation. Total amount payable is deposit plus all monthly payments plus interest. Pay half, and you can VT. You're responsible for any damage beyond fair wear and tear, and any outstanding missed payments.

The finance company can't refuse it. They can't add penalty charges for exercising a statutory right. What they can do is note it on your credit file — lenders can see VT history, and some treat it negatively when you apply for finance again.

More detail on this in our voluntary termination guide.

The real cost vs a bank loan

The HP costs £1,488 more than the bank loan over the full term. The monthly payments are £31 higher too. You'd need a specific reason to choose HP over a personal loan — and there are legitimate reasons, but "I didn't check" shouldn't be one of them.

The reasons HP can still win: your credit score makes a personal loan expensive or unavailable, the dealer has a competitive manufacturer-backed rate below 4.1%, or you want the statutory protections that come with a regulated credit agreement (VT rights, one-third rule). Those are real. They're just not always worth £1,488.

No mileage limits

One area where HP beats PCP outright. No annual mileage cap. No excess charges at the end. If you drive 20,000 miles a year, HP treats that the same as 8,000 miles a year. The depreciation is your problem once you own the car — not the finance company's.

When HP makes sense

• You want to own the car, not hand it back
• You drive high miles — no mileage cap, no excess charges
• You can't get a bank loan at a competitive rate
• The dealer is offering a manufacturer-backed rate below 4.1%
• You want the one-third rule protection and VT rights

When HP doesn't make sense

• You can get a personal loan at 4.1% or below — it'll cost less overall
• You want to change cars every 3-4 years — PCP's walk-away option suits that better
• The dealer's HP rate is 10%+ and your credit is good enough for a bank loan
• You're buying new and there's a 0% PCP deal from the manufacturer — that's hard to beat

Run your own numbers

The monthly payment tells you what leaves your account each month. The total cost tells you what the car actually costs you. Put your numbers into the calculator below and compare both figures.

The bottom line

HP is honest finance. You borrow money to buy a car, you pay it back with interest, you own the car. No balloon trap, no mileage anxiety, no condition inspection at the end.

But "honest" doesn't mean "best value." At 8-15% APR, HP is expensive credit. Check the bank loan rate first. If it's lower, use it. If it's not available to you or the HP rate is genuinely competitive, HP is a solid choice. Just go in knowing the total cost.