Buying a new car is an exciting and nervous process. There’s so many choices of car, model, year, mileage, colour and more. Finally when you’ve decided on all that you still have to decide how you’re going to finance this car. If you have the spare cash that’s usually the most financially smart way of purchasing anything. But what if you don’t? or don’t want to see such a lump of your savings taken away so quickly?
There’s a few different ways to finance a car, or any big purchase, here we’ve provided a quick guide on Hire Purchase.
What is Hire purchase
As we mentioned, hire purchase is one form of financing. It’s not just for cars but that’s what it’s most commonly used for. When you purchase an item with hire purchase (car, Laptop, phone, etc) you hire or rent the item and agree to monthly payments for a set amount of time. While you’re making these payments you do not own the item and are basically long term renting it. At the end of this time and when all payments have been made in full the finance company will sign over the item into your name and you will only then officially own it.
How does it differ from a personal loan
When you take out finance through a hire purchase contract you will not legally own the item until the final payment is made. If you fail to make a payment it is very easy for the finance company to take the item back as they are the rightful and legal owners until the very last payment. On the other hand when you purchase an item using a personal loan you will own the item from the beginning, the bank or finance company cannot take what is yours without going through a court first.
Advantages and Disadvantages
Hire purchase can often come with some fees added to your initial payment and a balloon payment at the end of your contract. These may be up to double your usual monthly payment and can be a small shock at the end when you think you’re almost finished with the loan.
Hire purchase also has fees for any early repayments, in part or in full. You are still entitled to pay off your loan early or to make a lump payment towards it but you may be hit with a €50 or €100 fee, it’s up to you and the amount you’re paying off to decide if the savings are worth the fees.
While you don’t own the item outright with hire purchase there are some benefits to it. Because the finance company has the security of still owning the item until the last payment they often offer a lower interest rate and allow easier access to finance than through a personal loan.
Personal loans on the other hand will have a slightly higher interest rate but you also own the item from the start. With a personal loan you can pay back early or pay extra into your loan each month with no fees, so you can throw the spare change into it at the end of the month without worry and clear it earlier.
Whichever finance option you opt for, hire purchase, cash or personal loan, be sure to ask plenty of questions of a professional, make sure you understand what kind of loan you’re getting.