HP car finance versus personal loans

When buying a car, many people want to own it outright, but don’t have the money. If you want to own a car, rather than lease one, two common ways to finance a used car you will eventually own are hire purchase car finance and personal loans.

This guide will help you understand how hire purchase (HP) car finance can help you own a car, while also providing some flexibility, versus a personal loan which allows you to own the car right away, without some of the restrictions that come with other financing options, such as personal contract purchase (PCP).

HP car finance: How it works

Hire purchase (HP) car finance is one of the most straightforward car finance options.

It also gives you the flexibility to finance used cars (as well as new cars), which can give you more options when you're looking to purchase a vehicle.

Getting a second hand car rather than buying new means you are not restricted by manufacturer waiting times or delays.

You avoid the immediate drop in value that happens when driving a new car for the first time, and in many cases, you can take your car home the same day.

Your first step will be to get an idea of what you can borrow and whether the associated monthly costs are affordable, as this will tell you how much you can comfortably spend on your car.

An HP car finance lender can tell you this information, or you could go to a broker for help, but they may charge you for this service.

Choosing the car

If your car finance application is approved, you can start looking for the specific car you want to buy.

You can select any car from a dealership, provided it meets the lender's criteria. Most lenders have specific requirements and often work with a network of trusted dealerships nationwide, so it's helpful to start your search within that network to find your ideal car.

If you're unsure about which car to buy, you can check out our guide “Choosing a car: everything you need to know before you buy”.

Deposit

When you enter a hire purchase agreement, you generally pay an initial deposit, often a percentage of the car’s total price. However, some lenders also offer zero deposit car finance options.

Because some lenders require a deposit, it's a good idea to check this with your lender before applying. For example, AutoMoney Motor Finance provides both deposit and zero deposit options.

Paying a deposit typically means your monthly payments will be lower, compared to a deal where you do not pay a deposit and borrow over the same period. This is because paying some of your own money may reduce the lender’s risk and lowers the amount you need to finance.

If you choose a no deposit option, your monthly payments will be higher since you’re financing the full cost of the car. Some customers may still choose to pay a deposit, even if it’s optional, to reduce their monthly repayments.

Fixed monthly payments

With HP car finance, your monthly payments are fixed, providing certainty about the amount due each month without any risk of increase. Payments are structured as instalments—a fixed amount payable on the same date each month—spread across the term of your agreement.

Most lenders include a documentation or admin fee in the first payment. Additionally, an ‘option to purchase’ fee is typically added to the final payment, meaning your first and last payments will be slightly higher than your regular monthly instalments.

Interest rates

The interest rate on your HP car finance will depend on factors like your credit score and the lender’s terms.

A higher credit score often results in a lower interest rate, which can save you money over the duration of the agreement.

On the other hand, if your credit score is lower, you may face a higher interest rate, increasing both your total repayment amount and monthly payments.

When applying for car finance it’s a good idea to shop around and compare interest rates from different lenders. This can help you find the best deal that suits your financial situation.

Car ownership

Once your Hire purchase agreement ends and you’ve made the final payment, including the option to purchase fee, you will own the car outright.

Unlike other car finance options, there is no large ‘balloon payment’ due at the end of the term, nor is there a requirement to return the vehicle. This makes HP a great choice for customers who want to own the car outright, once the finance agreement ends.

Under the Consumer Credit Act, you also have the right to settle your HP agreement early, either partially or in full, with a rebate on interest for the remaining term. While early settlement is allowed, some lenders may have specific terms for calculating rebates, so it’s beneficial to review your agreement for details.

Benefits of HP car finance

Choosing hire purchase for your car finance comes with some benefits, but there are also important things to consider. Here’s a list of the key advantages and factors to keep in mind when choosing hire purchase:

Lower final payment

At the end of the HP agreement, the option to purchase fee is typically lower than the balloon payment required in Personal Contract Purchase (PCP) agreements (PCP is another way to finance a car that you might consider, find out more in our guide Buying a car on finance: HP versus PCP).

This means that when the time comes to take ownership of your vehicle, the final cost will be smaller, making the transition to ownership more manageable.

No mileage restrictions

Unlike some other financing options, HP does not have mileage limits once your agreement starts. You can drive your car as much as you need, without facing extra charges.

This makes HP ideal for those who rely on their vehicle for daily commuting or long trips.

By contrast, other financing options often require you to set a mileage limit for the year. If you exceed this limit, you could incur additional costs that can start around £0.25 per mile.

It’s always a good idea to check with your finance provider about any mileage restrictions before signing up to an agreement.

Second hand car finance

Some finance options are limited to new or newer cars, which can mean higher values and increased monthly payments.

With hire purchase the loan amount is typically tailored to your affordability and budget, giving you more flexibility in your car search.

This means you can secure financing for second-hand cars as well. This makes HP a great choice for those looking to keep their monthly payments as low as possible, while still having a variety of cars to choose from.

Considerations of HP car finance

It’s great to consider the benefits of a finance product, but it’s even more important to take into account the potential drawbacks.

By doing this, you can avoid unexpected surprises and ensure you fully understand all the requirements throughout the finance agreement.

Potential for repossession

If you miss payments on your HP agreement, the lender has the right to repossess the car. This means you could lose the vehicle and it may also negatively impact your credit score

Before entering into an HP agreement, it’s important to make sure that the monthly payments are affordable and manageable to minimise this risk.

Life can be unpredictable, and personal circumstances can change due to unexpected events. If you find yourself struggling to manage your finance agreement, it’s always best to contact your finance provider right away.

Let them know about any changes in your situation and they may be able to offer help or alternative solutions.

Additional fees

Most HP agreements include additional fees, such as documentation or admin fees for processing your application. These fees can increase the total amount you need to pay, or increase your first monthly repayment.

Additionally, if you choose to settle your loan early, some lenders may charge an early repayment fee. Not all finance providers apply this fee, but it’s something to look out for.

It’s important to read the terms of your agreement carefully to understand any extra costs involved and avoid unexpected surprises.

Poor credit scores

If you have a less than perfect credit score, it can affect your ability to secure HP car finance.

Eligible lenders might offer you higher interest rates, which can increase the total loan cost and result in higher monthly repayments.

In some cases, poor credit could lead to a refusal of car finance altogether, limiting your options and making it more challenging to find a vehicle within your budget.

Before applying, it’s helpful to check your credit score and understand how it could affect your application.

What is a good credit score and what is a bad credit score?

Different credit reference agencies use their own scoring systems, generally with higher numbers indicating better credit. However, keep in mind that these are scores provided by the credit agencies themselves. Lenders will also conduct their own assessments, taking your credit score into account alongside various other factors.

• Experian typically give scores from 0-999, anything from 881 and above is considered good.
• TransUnion 721 or above is rated good or excellent, depending on the number.
• Equifax 670 or above is rated good, very good, or excellent, depending on the number.

For more details on how credit scores are calculated, you can visit each agency's website

Personal loans: How they work

A personal loan allows you to borrow a set amount to purchase a car. With a personal loan, you receive the full loan amount upfront, which you can use to pay for the vehicle.

One key difference between a personal loan and HP car finance is that, with a personal loan, you own the car immediately. This means you’re free to drive it, sell it, or make modifications without needing anyone’s permission.

You repay the loan over a fixed term, typically ranging from one to seven years, based on your choice. Each month, you’ll make regular payments that include both the principal loan amount and interest—the cost of borrowing.

Your monthly payment amount depends on factors like the total loan amount, interest rate, and loan term.

Before applying for a personal loan, it’s wise to shop around and compare different lenders to find the best interest rates and terms for your budget. Additionally, ensure the monthly repayments fit comfortably within your finances to avoid undue strain.

Choosing the car

With a personal loan, you can purchase any car you want, whether new or used, without lender restrictions. This offers more flexibility, allowing you to negotiate the price directly with the seller.

In contrast, car finance providers often have strict requirements about approved dealers, so with HP car finance, you generally cannot buy from a private seller.

While buying privately may offer greater flexibility, it also comes with more risk. Purchasing from a regulated dealer provides added protection if issues arise with the car

Loan amount and interest rates

The amount you can borrow depends on your credit score, income, and the lender’s criteria.

Personal loan interest rates vary, but generally, a higher credit score results in lower rates, while a lower credit score may lead to significantly higher rates depending on the lender’s terms. In some cases, a lower credit score might mean you don’t qualify for a personal loan or cannot borrow the full amount needed for a car purchase.

It’s a good idea to check your credit score before applying for any credit. If your score is lower than expected, you may want to work on improving it to secure a better rate, which could save you money over time

Fixed monthly payments

Like HP, personal loans have fixed monthly payments spread over the borrowing period, making it easier to budget for your car along with other expenses.

You’ll know exactly how much you owe each month, helping you avoid surprises. (In contrast, some types of borrowing have “variable” rates, where payments can fluctuate.)

Most personal loans have shorter terms than Hire Purchase agreements. If you want to keep monthly repayments as low as possible, consider looking for a personal loan lender with competitive rates and longer borrowing terms. A longer term gives you more time to repay and can lower monthly payments.

However, keep in mind that extending the repayment period means paying more in interest overall, as each payment includes an interest charge. So, the total cost could end up higher.

Car ownership

When you buy a car with a personal loan, you own the vehicle outright from the beginning. This ownership gives you the freedom to sell the car at any time, as you hold the legal title.

You can also modify the vehicle as you wish without needing permission from a finance company.

In contrast, with a finance agreement, the legal title remains with the finance provider until the final payment, including any 'option to purchase' fee, is made. During this period, your ability to modify or sell the car is restricted, and you’ll need the finance provider’s permission to do so.

Considerations of a personal loan

Considering additional factors related to a personal loan can help you decide if it’s the right choice for you. Reviewing all aspects ensures you select the best option for your needs.

Total cost of the loan

It’s essential to consider the total amount you’ll pay over the life of the loan. Some personal loans have high interest rates, which can significantly increase your overall cost.

While the monthly payments may seem manageable initially, it’s wise to think about any potential future challenges that could impact your ability to pay—do you have any major expenses coming up?

Fees and charges

Some lenders may charge fees for setting up the loan, such as application or origination fees.

Additionally, there may be early repayment fees if you decide to pay off your loan before the original end date. This might seem surprising since you’re repaying sooner, but lenders make their income from the interest charged over the loan term. Paying off early means they receive less interest.

These fees can increase the total cost of the loan, so it’s important to carefully review all terms and understand any potential fees before agreeing to a loan. This way, you won’t be caught off guard if you choose to repay early and discover a penalty applies.

Poor credit scores

If your credit score is less than perfect, it may affect your chances of getting a personal loan, as it can indicate past challenges with keeping up with payments.

To offset this risk, lenders may offer higher interest rates, which can increase the total loan cost and lead to higher monthly payments.

In some cases, poor credit may result in being declined for finance products altogether, limiting your options and making it more difficult to find a car within your budget. Checking your credit score and understanding its impact on your application before applying can be helpful.

How to tell if my credit score is good or bad?

Credit agencies use different scoring systems, but generally, the higher the score, the better. Have you had trouble paying a loan, credit card bill, or mortgage in the past? If so, these issues might lower your score.

It’s easy to overlook a missed payment, especially if it was resolved or happened a while ago. To know exactly where you stand, you can check your credit report with agencies like:

• Experian typically give scores from 0-999, anything from 881 and above is considered good.
• TransUnion 721 or above is rated good or excellent, depending on the number.
• Equifax 670 or above is rated good, very good, or excellent, depending on the number.

Which is the best option for you?

Choosing between HP car finance and a personal loan depends on your personal circumstances and financial situation. Consider factors such as whether you want to own the car outright, your budget, and your credit score.

Your personal preferences also play an important role in choosing the option that best suits you.

Take the time to assess your needs and how each option aligns with your financial goals. Both HP car finance and personal loans represent significant financial commitments, whether you're financing a new or used car.

For more information on other financing options, check out our guide, “Buying a car on finance: HP versus PCP”.

Apply for HP car finance

If you think HP car finance is the best option for you, AutoMoney Motor Finance are able to offer car finance on a wide range of vehicles nationwide.

To see if we can help you, call our friendly team on the free phone number above, or click through to apply for car finance with us.

Representative example

You could borrow £10,000 over 60 months with an initial payment of £490.66 (including £199 Admin Fee) followed by 58 monthly payments of £291.66 with a final payment of £490.66 (including optional £199 Option to Purchase Fee).

Total amount repayable will be £17,897.60.

29.3% APR, annual interest rate (fixed) 24.7%.

This example uses the representative APR. This is the rate at least 51% of customers are expected to get.

Lending is subject to status and additional affordability checks. Rates quoted are subject to change and will depend on lending amount and personal circumstances.

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