Hire Purchase (HP) car finance is a popular method in the UK for acquiring a vehicle, offering a blend of flexibility and accessibility. However, as the end of the agreement approaches, many consumers find themselves unsure of the next steps.
Understanding what happens at this crucial stage is essential to making informed decisions and ensuring a smooth transition, whether it involves taking full ownership of the car or returning it.
What exactly is HP finance?
Under a car hire purchase agreement, you agree to pay the cost of the vehicle in monthly instalments over a set period. This cost includes the price of the car plus interest. Unlike a personal loan, the vehicle serves as security for the finance; therefore, until the final payment is made, the car is technically owned by the finance company.
How HP agreements work
Before we dive into the end of a car finance agreement, it’s important to understand how the whole process works. In a nutshell:
- Down Payments: Most HP agreements begin with a deposit or down payment, typically ranging from 10% to 50% of the car’s value. This initial payment reduces the amount borrowed, potentially lowering monthly payments and overall interest.
- Monthly Payments: After the down payment, you’ll make fixed monthly payments for the duration of the agreement. These payments cover the car’s cost and the interest charged by the lender.
- Interest Rates: The interest rate on an HP agreement can vary depending on factors such as your credit score, the type of car, and the lender’s policies. It’s important to understand the interest rate and how it impacts the total amount you will pay.
🚗 More information in this guide: How Does HP Car Finance Work?
Duration of typical HP agreements
HP agreements in the UK typically range from 12 months to 60 months. The length of the agreement affects the size of your monthly payments:
- Shorter agreements have higher monthly payments, but you may pay less in total interest.
- Longer agreements spread the cost over more months, resulting in lower monthly payments but potentially higher total interest paid.
It’s vital to choose an agreement length that suits your financial situation. Remember, while the car is under finance, it’s at risk of repossession if you fail to keep up with payments.
Your end of agreement options
When you reach the end of your HP car finance agreement, you have several options. Understanding these options allows you to make a decision that best suits your financial situation and needs.
1. Final payment (balloon payment)
At the end of an HP agreement, there is often a final ‘balloon payment‘ that must be made to take ownership of the car. This payment is larger than your regular monthly instalments and represents the remaining value of the car. The existence and size of this payment depend on the terms of your specific agreement.
💰 Options for making the payment: You can settle the balloon payment in a lump sum, using savings, or perhaps a cash windfall. Alternatively, if you don’t have the funds available, you might consider other financial options, such as a personal loan or a new finance agreement.
2. Returning the car
If you decide not to keep the car, you can return it to the finance company at the end of the agreement. This option is particularly useful if the car is worth less than the balloon payment or if you want to upgrade to a new vehicle.
💰 Potential fees and charges: Be aware that returning the car can come with potential fees, especially if the car has exceeded its agreed mileage limit or has damage beyond normal wear and tear. These additional costs can be significant, so it’s important to understand the terms of your agreement.
3. Refinancing the balloon payment
If you want to keep the car but can’t afford the balloon payment, refinancing is an option. This involves taking out a new loan to cover the final payment, essentially extending your finance period.
💰 Pros and cons of refinancing: Refinancing allows you to spread the cost of the final payment over a longer period, making it more manageable. However, this means you’ll pay more in total interest, and the car will remain under finance for a longer period. It’s crucial to consider whether this is a financially viable option in the long term.
Each option has implications for your financial situation, and the best choice depends on your circumstances and future plans. In the following sections, we’ll explore in detail what each option entails, including the process of taking ownership of the car, early settlement possibilities, and what to do if you face financial difficulties.
Early settlement options
Early settlement refers to paying off the remaining balance of your HP agreement before the end of the agreed term. This can involve paying all remaining instalments and the balloon payment, if applicable, in one lump sum.
Deciding to settle your car finance agreement early can be a financially sound decision under certain circumstances. This section explores what early settlement entails, how to calculate the settlement amount, and the advantages and disadvantages of choosing this option.
How does early settlement work?
To initiate an early settlement, you need to contact your finance company and request a settlement figure. This is the amount you need to pay to settle your account. The finance company is obligated under the Consumer Credit Act to provide you with this figure upon request.
Calculating the settlement amount
The settlement amount includes the remaining balance on your HP agreement, any unpaid interest, and possibly an early settlement fee, depending on the terms of your agreement. The total amount can be less than the sum of the remaining payments, as you may save on future interest charges.
💡 The settlement figure will depend on how much you’ve already paid, the remaining term of your agreement, the interest rate, and any early repayment fees specified in your contract.
Advantages of early settlement
✅ Interest savings: Settling early can save you money on interest, especially if you’re in the early stages of a long-term agreement.
✅ Credit score benefits: Successfully completing a finance agreement early can positively impact your credit score.
✅ Reduced financial burden: Paying off your HP agreement early frees up monthly budget and reduces your overall financial liabilities.
Disadvantages of early settlement
❌ Immediate financial impact: Early settlement requires a significant lump sum payment, which might not be feasible for everyone.
❌ Early repayment fees: Some agreements include fees for early repayment, which could reduce the financial benefit of settling early.
Preparing for the end of the agreement
As the end of your HP car finance agreement approaches, it’s important to prepare adequately. This preparation ensures that you can smoothly transition to the next step, whether that involves taking ownership of the car, returning it, or entering into a new agreement. Here’s how you can get ready:
Reviewing the agreement terms
Revisit your HP agreement to refresh your understanding of the end-of-agreement options available to you. This includes details about the final balloon payment, return conditions, or any early settlement terms. Ensure that you are aware of any fees or charges that may apply at the end of the agreement, such as early settlement fees or charges for excess wear and tear.
If you plan to keep the car and make the final balloon payment, start planning and saving for this sum well in advance. Consider setting aside a portion of your income regularly to accumulate the necessary funds.
Vehicle inspection and maintenance
If you’re considering returning the car or using it as a part-exchange, have it thoroughly inspected. Check for any damages or issues that might result in charges from the finance company.
💡 If there are any outstanding maintenance tasks or minor repairs, it’s usually more cost-effective to address these before the end of the agreement, as the finance company might charge higher rates for the same repairs.
Documentation and record keeping
Compile all relevant documentation, including service records, MOT certificates, and any communication with the finance company. These documents are crucial, especially if there’s a dispute about the vehicle’s condition or history.
Exploring future options
If you plan to return the car or upgrade, start researching your next vehicle in advance. Consider your current and future needs to make a choice that suits your lifestyle and budget. Remember to discuss your intentions with the finance company. They might offer options for a new agreement or provide tailored guidance on the return process.
What happens once you gain ownership of the car?
Upon successfully completing all payments under your HP agreement, including any final balloon payment, you gain full ownership of the vehicle.
Owning the car outright provides a sense of freedom and accomplishment. However, it also comes with responsibilities. Ensure you are prepared for these to make the most of your car ownership experience.
Once you make the final payment, including the balloon payment if applicable, the ownership of the car transfers from the finance company to you. The lender will typically send you a ‘Notice of Completion‘ confirming that all payments have been made and that you now legally own the car.
Along with the Notice of Completion, you should receive the vehicle’s ownership documents. This includes the log book or V5C, which you will need to update with the DVLA (Driver and Vehicle Licensing Agency) to reflect your ownership.
What to check before the car becomes yours
You might be familiar with the car you now legally own, but it’s always best to take a look over the small print before signing on the dotted lines.
- Warranties and servicing: Check if there are any existing warranties on the car and whether they will continue once you own the car. It’s also a good time to ensure the car has been serviced according to the manufacturer’s schedule, as any missed services might affect warranty coverage.
- Vehicle condition: Conduct a thorough check of the vehicle’s condition. While you might already be familiar with the car, it’s good practice to check for any issues that might need addressing, such as maintenance or repairs.
💡 More information: Most Frequent Car Faults & What To Do About Them.
Responsibilities as the new owner
As the legal owner, you’ll find you have a lot more responsibilities with regards to your car. These include, but are not limited to:
- Tax and insurance: As the new owner, you are responsible for ensuring the car is taxed and insured. Make sure your car insurance is updated to reflect your ownership status.
- Maintenance and repairs: Regular maintenance is crucial to keep the car in good working condition. As the owner, all maintenance and repair costs are now your responsibility, so it’s wise to budget for these expenses.
- MOT test: Ensure your vehicle is up to date with its MOT tests, which are mandatory for all vehicles over three years old in the UK. This test checks vehicle safety, roadworthiness aspects, and exhaust emissions.
If you have doubts or questions about your HP agreement, it’s wise to seek legal advice. Legal professionals can provide clarity on your rights and obligations under the agreement.
The end is rewarding!
Navigating the end of a Hire Purchase car finance agreement can seem daunting, but with the right information and preparation, it can be a straightforward process. Whether you’re planning to take ownership of the vehicle, return it, or upgrade to a new car, understanding your options and responsibilities is key to making informed decisions!
Frequently asked questions
Can I sell the car before the end of the HP agreement?
Legally, you cannot sell the car until you’ve paid off the HP agreement in full, as the finance company owns the vehicle until then. If you wish to sell the car before completing the agreement, you must first settle the finance. This involves paying the outstanding balance, including any early settlement fees.
What happens if the car is written off or stolen?
If the car is written off or stolen during the HP agreement, your insurance company will typically pay out the market value of the car. If this amount doesn’t cover the outstanding finance, you will be responsible for the difference. It’s advisable to have GAP (Guaranteed Asset Protection) insurance in such cases, which covers this shortfall.
Will settling a HP agreement early affect my credit score?
Settling an HP agreement early can have a positive impact on your credit score, as it demonstrates good financial management. However, it’s important to ensure that all other financial commitments are met to maintain a healthy credit score.
Can I upgrade or change my car mid-agreement?
Some finance companies allow you to change or upgrade your car during the HP agreement, but this usually involves settling your current agreement and starting a new one. The terms depend on the amount outstanding on your current finance and the value of the car.
What happens if I exceed the agreed mileage?
HP agreements typically don’t include mileage restrictions (unlike PCP – Personal Contract Purchase agreements). Therefore, exceeding a certain mileage usually isn’t a concern with HP agreements. However, it’s always advisable to check the specific terms of your contract.
🚗 You might like this guide: HP vs PCP car finance.