When you choose between the car finance products available, there is a question that comes up: do you want to own the vehicle at the end of the finance agreement? Some finance products allow you to return the vehicle or part exchange it towards the financing of another. If you want to own it, then there are two main options: hire purchase and lease purchase.
In both these types of car finance product, you own the vehicle at the end of the agreement. But which one is the right option for you? Let’s take a look at each product so you can see which finance option will work best for you.
A hire purchase finance agreement works by dividing the entire cost of the car and the finance package across the length of the agreement. The interest charged on hire purchase is set at a fixed rate, meaning it will stay the same percentage. This means you can work out exactly how much interest will be accrued across the agreement before it begins. Hire purchase divides the total cost of the car plus the total cost of the finance into the monthly payments of the agreement.
The biggest benefit of hire purchase is that you know exactly how much you will need to pay each month across the entire length of the agreement. This means you will be able to budget exactly what’s needed month on month until the end of the finance period. Once that finance period is complete, then you own the vehicle.
Another benefit is that there are no mileage or condition restrictions when it comes to using your car. So you can use it as much as you like and not have to worry about preserving the condition in case you decide to return the vehicle at the end of the agreement.
You also gain some equity from the amount of money you put into the finance package, as you own the asset – in this case your car – at the end.
With a fixed rate of interest, you may not be able to benefit from any changes in the financial market which could see interest rates drop. Like with all vehicle purchases, there is also depreciation to take into account. Car’s lose value over their lifetime, but you can choose models that don’t suffer as much depreciation to counter this.
Lease purchase works in a similar way to hire purchase with one big difference. At the start of the agreement, you defer a proportion of the car’s value to the end of the agreement. So for example, you could set this end proportion as 25%, meaning you would pay off the 75% with the monthly payments until you get to this final payment, also referred to as a balloon payment.
The biggest benefit of lease purchase is that you can reduce your monthly finance payments a great deal by deferring a proportion of the car’s value to the end of the agreement. This means you get the benefit of lower monthly payments like you would in a car leasing deal, but also that you don’t have to worry about mileage or condition limits as you own the vehicle at the end of the agreement.
So if you know there is going to be a positive change in your financial situation going forward, e.g. a new job or promotion, then you can prepare for the balloon payment without having too big a monthly payment to contend with before that change occurs.
You can also often refinance this balloon payment, starting a new finance agreement against that deferred payment.
There is always a danger that you may not be able to afford the balloon payment when the time comes due to some unexpected cost. While you may be able to refinance the balloon payment into another finance package, this is still a potential issue that should be considered.
Hire purchase and lease purchase both work in very similar ways. The advantage of hire purchase is that the entire cost is divided into monthly payments, meaning you pay off the total cost across the agreement. Lease purchase monthly payments are lower, giving you more money to spend elsewhere each month, but you need to factor in that balloon payment at the end of the agreement.
If you are undecided or need more information, you can look at our car finance calculator to work out how much you might be able to afford. You can also complete our simple no-obligation application form and one of our customer advisors will be in touch to talk you through the options available.