Car finance/Hire purchase
Many ‘car finance loans’ offered by garages and some lenders are actually hire purchase agreements. Hire purchase is different from a personal loan because you don't own the car until you have made the last repayment. So check what you are being offered first and know what you are signing up to.
The main reason you might choose a hire purchase agreement is convenience, as the garage selling you a new car may also arrange your finance. So, it saves you having to visit your bank, building society or credit union to arrange a personal loan.
How hire purchase works?
Comparing a hire purchase agreement with a personal loan
How flexible are hire purchase agreements?
Fees and charges
Interest and how it is charged
What does a hire purchase agreement contain?
Hire purchase and your credit record
What is a balloon payment?
With hire purchase, the garage acts as an agent for a finance company and earns commission to arrange the finance for you. In this case, the garage is acting as a credit intermediary and must be authorised to act on behalf of the finance company. You can check if they are authorised on our register of Credit Intermediaries.
When you use a hire purchase agreement to buy a car, the motor dealer sells the car to the finance company. The finance company then rents the car to you for an agreed period of time in return for a set monthly repayment over a number of years.
During the agreement, you can use the car but the finance company actually owns it. They are the owner, and you are the hirer. At the end of the agreement, the finance company passes ownership of the car to you, provided you have made all the repayments.
Try not to be influenced by repayments that seem low - look at the total hire purchase price as this is what you must pay to own the goods. And don't choose long, fixed-repayment agreements if you can get a more flexible personal loan from a credit union or bank.
If you cannot clear your debt in the agreed time, your credit rating may be affected and this can make it more difficult for you to get a loan or mortgage in the future. And, the finance company may have the right to repossess the car if you cannot pay in full.
The main difference between using a personal loan and a hire purchase agreement to buy a car is that with a personal loan you borrow money, pay for your car, and own it immediately. With a hire purchase agreement, you don’t own the car until you make the last repayment. This means you cannot sell the car if you run into problems making your repayments.
If you want to compare the cost of a hire purchase agreement with the cost of a loan, you cannot compare them by using the APR as a hire purchase agreement does not have to show APR as a loan does. Instead:
- compare the total amount of interest and costs you have to pay back
- make sure to include any additional charges when comparing the cost of the loan with the cost of a hire purchase agreement.
These agreements are among the least flexible forms of finance. Because the interest rate is fixed for the term of the agreement, you cannot usually increase your repayments each month if you wish to do so. If you want to extend the term, you may be charged a rescheduling fee.
If you can afford it, you can decide at any time to pay off the full hire purchase price and become the owner of the car. If you do this, you may be entitled to a discount on the interest you have to pay. This is known as an ‘interest rebate’. But, if you pay off the agreement early, you will not save as much in interest as you would with a variable rate personal loan. If you want to end a hire purchase agreement early and you don’t want to keep the car, read our section on car finance and repossession which explains all your options.
The example below shows what Joe would have to pay to buy the car two years into a five-year agreement.
|Joe is in month 25 of a five-year agreement.|
|(1) Hire purchase price||€16,790.69|
(2) Less: Total amount Joe has paid to date:
|Amount Joe still owes (1) – (2)||€9,195.69|
|Less: Interest rebate||-€574.89|
|Total Joe must pay to own the car||€8,620.80|
You are entitled to a 10-day cooling-off period, during which you can change your mind. The 10 days starts when you are given a copy of the agreement and you can think about the terms and conditions. Most hire purchase agreements have a waiver. If you sign this waiver you give up your right to the 10-day cooling-off period in return for getting the car straight away. Use the 10-day period to consider all your car finance options and ask the dealer to hold the car for you.
You are entitled to a list of all additional charges and fees, so ask the garage for this before you sign any agreement.
Joe picks a car that costs €13,300 from a car dealer. The dealer arranges a five-year hire purchase plan for Joe, and asks for a deposit of €1,000.
The real cost of Joe’s car is the hire purchase price of €16,790.69
|(1) Cash price
(This is the cost of the car if Joe was paying cash)
|Less: Deposit or part exchange||-€1,000.00|
|Amount for finance||€12,300.00|
|(2) Plus: Interest charge||€3,355.20|
| Plus: Fees
(3) Documentation fee
(4) Completion fee
|Hire purchase price
|As well as paying his deposit of €1,000, Joe must pay back the amount for finance (€12,300) plus the interest (€3,355.20) in 60 instalments of €260.92. He must pay the documentation fee with his first payment and the completion fee with his last payment.|
The total amount you pay back to the finance company is called the hire purchase price. It is made up of:
- the cash price of the vehicle, plus
- interest, plus
- fees to set up and end the agreement.
The interest rate on hire purchase varies depending on the finance company and the item you are financing. With car finance, the rate may be similar to the interest rate on a personal loan.
Interest is calculated at a fixed rate on the total amount you borrow for each year of the agreement. If you pay off the agreement earlier than planned, this type of agreement will often work out more expensive than if you had taken out a variable rate personal loan.
When comparing options, make sure you compare the total amount payable on a personal loan (cost of credit) with the hire purchase price (the original amount of finance, plus interest and fees). Use our personal loan cost comparisons to help you.
You must be given a copy of the hire-purchase agreement, in writing, within 10 days of the agreement being made. The words ‘Hire-purchase agreement’ must be clearly written on the document, and the agreement itself must include the following information:
- A description of the car the agreement refers to
- The cash price of the car (the cost if you paid in full with cash)
- The number of instalments you have to pay, when you have to pay them (for example, every week or every month) and the amount of each instalment
- The hire-purchase price (the total of all instalments, any deposit you pay, plus fees) that you must pay to own the car
- Details on your rights to end the agreement early
- Information about the ‘cooling-off’ period (the time in which you can change your mind and decide not to go through with the agreement)
- A statement saying that you must let the owner know where the car is normally kept
- Information on the costs and penalties you will have to pay if you do not stick to the terms of the agreement
- Details of the restrictions on the owner, if they are repossessing the car
- Information about the ‘half rule’ and the 'one-third' rule.
With some hire purchase agreements, the monthly payments are not evenly spread out and you may pay less in the earlier months of the agreement. This may result in a large final payment at the end of the term, known as a balloon payment. This can make your monthly repayments appear more affordable.
The amount of your final repayment is very important because:
- a large final payment could be more than the value of the car at the end of the agreement
- you will have to have that money available to pay at the end of the agreement if you want to own the car
- you could end up in a new hire-purchase agreement if you cannot afford to pay it off
- the larger the final payment, the longer it takes to pay half the hire purchase price
As with other types of credit, when you take out a hire purchase agreement, your lender will send details of the repayments you make to a credit-reference agency, such as the Irish Credit Bureau (ICB). Find out more about what information in shown in your credit history.
Be aware that if you agree to act as guarantor for someone taking out a hire purchase agreement, you may find that you are a joint hirer and not just a guarantor. Any missed repayments on the agreement may show up on your credit record, as well as the person you agreed to act as guarantor for.
It is worthwhile checking the registration documents of a second hand car to make sure that it is not already owned by a finance company, in which case the person trying to sell you the car does not actually own it and therefore does not have the right to sell it to you.