The two most popular ways for buying a car on finance in the UK are ‘Contract purchase’ and ‘Hire purchase’. Some differences should be considered while buying a car on these types of car financing to get the best. Let’s talk about contract purchase vs hire purchase.
Many UK drivers take benefit from car finance while buying a car and these two ways are famous for that. You should consider many things before getting into car finance. So read our blog, if you are drawing car finance for the first time.
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What is Hire Purchase finance?
Hire purchase (HP) is a car finance type that allows drivers to get new or used cars. In this, you first pay a deposit and then pay the remaining amount of the car, along with the interest through monthly instalments.
The loan provided to you is secured against your car value. So, you’d own the car after repaying all the instalments and paying ‘the option to purchase fee at the end of the agreement.
What is Contract Purchase Finance?
It is one of the renowned ways of buying a car. Here buyer also pays instalments but not against the total value of the car rather they estimate the depreciation of the car.
At the contract’s end, you have the option to return the car, exchange it for a new car, and do balloon payments (final payments) for owning the car.
Contract Purchase vs Hire Purchase – Similarities:
Both finance systems provide the opportunity to expand the payments over a long period through the monthly instalment system. Another merit that attracts customers in car finances is the breakdown of the money, it means customers don’t need to pay the entire payment altogether to own a car.
You are liable to pay interest on both car finances on the repayments. And you can reduce your monthly payments by providing a larger deposit at the start.
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Contract purchase vs Hire purchase – Differences:
The first major difference between the two finance systems is the amount repayable each month is different in both. As it differs based on the car’s model and borrowed money.
In a Hire purchase, the repayments are equal to the value of the car and interest over a contract term (12 to 60 months). After paying all the repayments, the borrower gets his vehicle.
Generally, the payments of the Personal contract are normally lower than the Hire purchase. A lender will guess the worth of the car after the end of the contract to find out the Guaranteed Minimum Future Value (GMFV). The payments will include the difference between this and the car’s initial value.
At the end of the contract payment, the borrower has the choice to buy the car by giving final payments (balloon payment). This final payment is normally based on GMFV.
Quick Wrap Up:
So we have evaluated the similarities and differences between contract purchase vs hire purchase. I hope the details will help you to find out your car as per your financial circumstances. Instead of paying lump sum money, the cost of your car will be divided into the number of months and you’ll pay them by instalments.
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Disclaimer: This blog provides basic information about contract purchase and hire purchase.
