Car HP (Hire Purchase) Calculator

What Hire Purchase actually is

Hire Purchase is a secured instalment agreement. The finance company buys the car and hires it to you: you pay a deposit, then a fixed monthly payment for an agreed term. You are the registered keeper and you drive and insure the car, but the finance company remains the legal owner until the final payment and the option-to-purchase fee have been made. At that point ownership transfers to you.

That single fact drives almost every practical difference between HP and a personal loan. Because the debt is secured on the car, HP is usually easier to be approved for and often carries a lower APR than an unsecured loan of the same size. The trade-off is that the car can be repossessed if you fall behind, and you cannot sell it while money is still owed without settling the agreement first.

HP is regulated under the Consumer Credit Act 1974, which gives you two rights a personal loan does not: the right to settle early at any time, and the right to hand the car back once you have paid a defined proportion of the total. Both are covered further down this page.

How the monthly payment is worked out

The amount financed is the cash price of the car minus your deposit and any part-exchange value. Interest is charged on the reducing balance, and the payment is set so that balance reaches zero at the end of the term. This calculator uses the standard annuity formula: M = P x r / (1 - (1 + r)^-n), where P is the amount financed, r is the monthly rate (APR divided by 1200) and n is the number of months.

Every payment is split between interest and capital. Early on, more of each payment covers interest, because the outstanding balance is at its highest. As the balance falls the interest portion shrinks and the capital portion grows, which is why settling in the first year saves proportionally less than the remaining-payments total suggests.

Two figures decide the total cost: the APR and the term. Lengthening the term lowers the monthly payment but increases total interest, because you borrow the same money for longer. Raising the deposit reduces both, because it cuts the amount financed directly.

APR is not the same as a flat rate

Some dealer quotes advertise a flat rate rather than an APR. A flat rate charges interest on the full original balance for the whole term, ignoring the fact that you are paying that balance down every month. The APR reflects the true cost on the reducing balance, which is why a flat rate is worth roughly double the equivalent APR on a typical term.

UK lenders must show the APR on regulated agreements, so compare quotes on APR and on total amount payable, never on the monthly payment alone. A lower monthly payment achieved by stretching the term is not a cheaper deal.

Check whether the quoted APR is the representative APR or your personal rate. A representative APR only has to be offered to 51% of accepted applicants, so the rate you are given after a credit check can be higher than the one advertised.

HP compared with PCP and leasing

HP spreads the entire cash price across the term, so the monthly payment is higher than PCP on the same car, but you own the car at the end and there are no mileage limits or condition charges. It suits people who keep cars a long time or drive high mileage.

PCP defers a large part of the price into an optional final balloon payment, the guaranteed minimum future value, which cuts the monthly payment considerably. At the end you choose whether to pay the balloon and keep the car, hand it back, or part-exchange any equity. PCP suits people who change cars every three or four years, but mileage limits and damage charges apply.

Personal Contract Hire is pure leasing. You never own the car and simply hand it back at the end. It is usually the lowest monthly cost of the three on a new car, with no equity and no ownership.

Some HP agreements also include an optional balloon payment, often sold as lease purchase. These lower the monthly payment in the same way PCP does, but unlike PCP the final payment is usually compulsory rather than optional, so check the agreement carefully before signing.

Settling an HP agreement early

Section 94 of the Consumer Credit Act 1974 gives you the right to settle a regulated HP agreement in full at any time. You ask the lender for a settlement figure, which they must provide, and paying it clears the agreement and transfers ownership to you.

The settlement figure is not simply the sum of your remaining payments. You receive a statutory rebate of interest you have not yet incurred, calculated under the Consumer Credit (Early Settlement) Regulations 2004. The lender may defer the settlement date when calculating that rebate, by 28 days plus a further 30 days on agreements running longer than a year, so the figure usually includes a little more interest than a pure balance calculation would give.

You also have a right to partial early settlement, paying a lump sum to reduce the balance. Ask the lender to confirm in writing whether the monthly payment or the term will be reduced as a result, because the two produce very different savings.

Voluntary termination, the 50% rule

Sections 99 and 100 of the Consumer Credit Act 1974 let you end a regulated HP agreement early by handing the car back. Your liability is capped at half of the total amount payable under the agreement, and that total includes the deposit, all interest, fees and the option-to-purchase fee.

If you have already paid at least that half, you can usually return the car and owe nothing further. If you have not yet reached it, you pay the shortfall up to the halfway point. The car must be in reasonable condition for its age and mileage, and any arrears are still owed on top.

Voluntary termination is a statutory right, not a concession from the lender, and it applies regardless of what the car is currently worth. It is worth knowing about before agreeing to a part-exchange that would clear a loss-making agreement by rolling negative equity into the next one.