Hire purchase agreements can be an appealing car finance option for anyone that would like to own a car at the end of the contract. But, as with anything finance related, credit scores can be an inherent – and often intimidating – factor in the application process. In this guide, we’ll explain exactly how lenders treat credit history with hire purchase applications. Additionally, we provide tips on how to find a bad credit hire purchase agreement that gets you on the road quickly.
What is hire purchase?
A hire purchase agreement is a form of car finance, in which you are hiring the car from a dealership, with the option to purchase the car at the end of the contract for an additional fee.
They’re different from other forms of car finance, like a personal contract purchase, in the way that they calculate the fees during the hire period, and the purchase amount at the end of the deal.
With a hire purchase agreement you won’t need to pay a balloon payment at the end of your contract, like you would have to with personal contract purchase.
Who is eligible for hire purchase?
Anyone can be eligible for hire purchase, as long as you can provide evidence of the following:
- Name, date of birth, and address history
- Employment details and history
- Bank details of account you will pay from
- Driver’s licence
- Proof of address
- Proof of income
Unlike other forms of finance and borrowing, hire purchase does not rely so much on eligibility criteria. Instead, you’re required to put down an upfront deposit, usually 10% of the car’s value, followed by monthly repayments plus interest.
Can you get hire purchase with bad credit?
Yes. In fact, even if you find that you are not eligible for an unsecured loan due to a lower credit score, you may still be eligible for a hire purchase agreement.
This is because the debt in a hire purchase is secured against the car itself, rather than relying on your credit score as evidence of reliable borrowing and repayment.
While a low credit score won’t necessarily stop you from getting a hire purchase agreement, though it still can in some cases, a high credit score may help you to get a more favourable interest rate from the finance provider.
Is hire purchase a good idea?
As with all forms of borrowing and personal finance, there is no single right or wrong way to do things, and all decisions will depend on what makes sense for your needs and preferences.
Generally speaking, hire purchase is ideal if you’re planning to buy the car at the end of the agreement, but would like the option to back out if you change your mind.
Due to the way that the industry calculates hire purchase rates, you pay slightly more than you would with personal contract purchase during the hire period of the agreement. However, the final payment to own the car will be much lower.
Would you like to know more about the benefits? Then read our full guide on hire purchase advantages and disadvantages.
What other car finance options are available with bad credit?
Of course, hire purchase isn’t the only car finance option out there. You have many to choose from, each with their own specific use cases.
Personal contract purchase (PCP)
As outlined earlier, a personal contract purchase works similarly to hire purchase. However, the main difference is how to calculate payments.
The amount you pay each month is based on an estimate of the car’s value at the end of the term, known as the Guaranteed Minimum Future Value (GMFV). Compared to other options, which base their rates on the current value of the car, this can result in cheaper monthly payments.
The caveat to this is that the final “balloon payment”, which gives you the option to buy the car outright, will be more expensive than it would be with hire purchase. It’s also worth noting that personal contract purchase is harder to find for used cars, in comparison to hire purchase.
An unsecured personal car loan allows you to buy the car outright from the beginning, as if you were paying in cash savings. You will then repay the loan provider in a series of monthly repayments.
This can be a good option if you know from the beginning that you want to own the car. It can sometimes work out cheaper than purchasing through finance deals.
However, it’s worth keeping in mind that unsecured personal loans rely on your credit score as a measure of your borrowing history, so they may be harder to get approved for with a low credit rating.
Pay with cash savings
Ultimately, paying directly in cash will cost the least in total when all is said and done. You won’t need to pay any interest or stay on top of repayment terms, and the car will be yours outright from the beginning.
However, it also means that you don’t have the option of switching to a new car every few years, as you might with car finance, which may be preferable for some people. So often paying in cash is only worth it if you’re absolutely certain you’d like to own the car long-term.
How to get hire purchase with bad credit
If you have a low credit score and think hire purchase is the right choice for your needs, follow these steps to make an application:
- Find a car*.
- Gather your personal information (proof of ID, proof of income, proof of address).
- Check your eligibility.
- Choose a car finance lender.
- Apply for finance (the lender will run a hard check on your credit report).
- Receive a finance agreement proposal from the lender, if approved.
- Take a moment to consider the following: Is this type of car finance the best for your needs? Are the monthly repayments affordable?
- Agree to the terms with the lender.
- Drive away in your newly-financed car!
* Some of our hire purchase lenders allow you to sort your car finance first, then can help you find a car through one of their approved dealerships. So, if you’d rather know your finance options before you decide on a car, simply check your eligibility.
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Warning: Late repayment can cause you serious money problems. For help go to moneyhelper.org.uk
36.8% APR Representative (fixed)
Representative example: 36.8% APR Representative based on a loan of £12,500 repayable over 48 months at an interest rate of 36.8% pa (fixed). Monthly repayment of £500.83. Total amount repayable is £24,039.67.