Hire purchase (before you buy)
Hire purchase (HP) is a common way of paying for major items, such as, cars, furniture and computers. But like any credit deal, you need to think carefully before committing yourself. This information will help you decide if HP is the right choice for you. It explains how an HP agreement works and what to look out for. Our advice also applies to conditional sale agreements, which are very similar to HP.
What are hire purchase and conditional sale?
With other forms of credit, such as a loan or credit card, the goods you buy belong to you straight away. When you use HP:
- You don't legally own the goods until you've paid back all the money you owe. This means that you cannot modify or sell them without the lender's permission
- Your contract is with a finance company (not the retailer) who will own the goods until the final payment is made
- The finance company can take the goods back if you don't keep up your repayments
- You will be liable for any damage caused to the goods during the contract period.
Under a hire purchase agreement, you pay an initial deposit followed by monthly payments (a portion of the money you borrowed plus interest) over an agreed period.
At the end of this period, you have the option of owning the goods outright, although your lender may require you to pay a fee (check because this could be high).
agreements are similar to HP, you will own the goods once all your instalments have been paid. There will be no extra fee to pay at the end.
Shop around before you sign
Explore other credit options first. You may be able to borrow the money more cheaply through a loan, or get a better deal from another HP provider.
A good way to compare the cost of credit is to look at the (annual percentage rate) and the total amount you will pay. Remember there may be fees or charges as well as your monthly repayments.
If you opt for HP, take the time to understand what you are agreeing to and if you can afford the deal. If your circumstances change for the worse, you may lose both the goods and the money you've paid.
Read the small print
Lenders must give you key information about the contract that you can take away and consider before you buy.
The HP contract you are given to sign must state in plain language what is expected of you and how much you will pay. You should read the contract carefully and only sign it if you are completely satisfied.
If your agreement does not include all important financial information, the lender may need to get a court order to enforce it.
If you have any questions, ask your retailer or lender. If you are still unsure, seek independent advice before committing yourself. Don't sign anything you don't understand.
Your HP contract may state that:
- You are at risk of losing the goods and will become liable to pay the lender the full amount, after one late or missed payment, or if you break the agreement in some other small way
- You must pay excessive charges if you break the agreement. For example, excessive charges for reminder letters for late payment.
These could be unfair terms. If you spot such statements, challenge your lender about them before signing the contract. Only a court can decide if a term is unfair. If you've already signed an HP contract which you think might contain unfair terms, seek advice. See Unfair terms in contracts for more information.
Insurance offered with HP agreements
You may be offered payment protection insurance to cover you against ill health or unemployment.
If you are buying a car, you may also be offered insurance (GAP) - to cover you against any shortfall on your own motor insurance if the car is written off or stolen.
In both cases, think carefully about whether insurance is a good deal for you. Check the small print for any exclusions, for example payment protection insurance may not apply to self-employed people.
If you decide to go ahead with insurance you may be better off paying the premium in cash, rather than including it in your credit deal.
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- Consumer Direct