All you need to know about hire purchase

A HP agreement is a credit agreement. You hire an item (for example, a car, laptop or television) and pay an agreed amount in monthly payments. You do not own the item until you have made the final payment. Personal Contract Plans (PCPs) are a type of hire purchase agreement.

What you should know:

• Some HP agreements have a balloon payment at the end of which is normally higher than your usual monthly payments
• You do not legally own the item until after the final payment is made, but you do have full use of the item throughout the payment period
• You cannot legally sell the item until the agreement has been paid off
• If you do not keep up the repayments, the item can be seized
• You have the right to end the agreement at any time

You can take out a hire purchase agreement with a bank, building society or finance company. If you take out a HP agreement with a retailer, you should know the store or garage is not actually providing the loan. It is acting as an agent for a finance company and will earn commission from it for arranging the loan. This is called being a credit intermediary and the agent must be authorised by the Competition and Consumer Protection Commission (CCPC) to do this.

Hire purchase agreements usually last 2-5 years - most last three years. You should read a hire purchase contract very carefully before committing yourself to any agreement.

Personal Contract Plans (PCPs)

This is a specific type of hire purchase agreement offered by car dealers. You pay a deposit and continue to make regular instalments, usually over three years. There is usually a large lump sum payment at the end of the contract. Then, you can either pay the final lump sum and keep the car, or return the car to the seller (you can take out a new PCP arrangement on another car).

You do not own the car until you make the final payment. You must stick to certain restrictions on usage and maintenance, such as mileage limits and servicing obligations.

PCPs can seem attractive as they usually have very low monthly repayments, but can be very complex compared to other types of car finance. It is important to understand all the terms and conditions before you sign up.

Hire purchase costs

To calculate the real cost of a hire purchase agreement:

1. Find the total hire purchase price

2. Find the price of a cash purchase of the same item

3. Deduct the cash price (2) from the total hire purchase price (1)

For example, a garage offers two prices for the same car. The car will cost €12,000 if you buy it outright with cash. Alternatively, it will cost €17,000 if you want to hire purchase. The hire purchase cost is €5,000.

Lenders have different hire purchase costs. Some will quote an APR (Annual Percentage Rate) that can help you compare hire purchase costs. It may be misleading to compare a hire purchase APR with that of a normal bank or credit union loan because you are paying for the hire of the goods. Unlike a loan, you do not own them until the last instalment of the HP agreement has been paid.

Since last May, there is a maximum interest rate of 23% APR for hire purchase agreements.

Hire purchase charges and fees

Hire purchase agreements may also involve additional fees and charges. These vary, but may include:

Documentation fees

Penalty fees for missed or late payments

Interest surcharge for missed repayments - this means an additional amount of interest will be charged on the amount unpaid

Completion fee for ownership of the goods to pass to you - sometimes you have to pay a balloon payment much higher than your usual monthly payments

Repossession charges - you could be charged for repossession costs or for failure to take reasonable care

Rescheduling charge - if your lender agrees to change the loan terms

Any balloon payment charged on a hire purchase loan has the effect of postponing part of the costs until after the loan. This means in the earlier months and years, you are paying less off your loan than you would for a bank or a credit union loan. You have to pay the balloon payment to clear the loan and to become the legal owner.

What must be in a HP agreement contract?

A hire purchase agreement is drawn up and signed by you (the hirer) and on behalf of the owner (the finance company). If there is a retailer involved, for example, a garage, it also signs the agreement and supplies the items in question. The hire purchase must include:

• The item covered under the agreement, for example, a car or computer.
• The cash price of the item.
• The hire purchase price. This is the total amount you will pay over the life of the loan. The hire purchase price is the monthly payment or instalment multiplied by the number of instalments which you have to make.
• The amount of each instalment you have to pay. Sometimes the final instalment is much larger than all the others (a balloon payment).
• The date you must pay each instalment.
• The names and addresses of all the parties to the agreement.

A statement that you have the right to withdraw from the agreement within 10 days of receiving a copy of the agreement. This is known as a cooling off period. Often you are asked to give away this right by signing a waiver. You do not have to sign this waiver.

A statement that you must tell the owner (finance company) of the locations of the item.

The words “Hire Purchase Agreement” which must be stated clearly and in a prominent place on the agreement form.

The fees, charges, and penalties that apply.

The Annual Percentage Rate (APR) charged (for agreements made since May 16, 2022).

Unless all of these requirements are contained in the agreement, the agreement may not be legally enforceable.

Can I end a HP agreement?

You can end the agreement at any time by giving notice in writing to the owner of the goods (the finance company). This is a legal right under the Consumer Credit Act 1995. Breaking a hire purchase contract before its normal end date usually involves penalties. You have two options:

1.Buy the item earlier than planned. You can own it by paying the difference between the amount already paid and the total hire purchase price. There is usually a reduction on the overall amount due as you are paying the loan off earlier than planned. This reduction is calculated using a recognised formula for early loan repayments. However, the amount of any reduction is relatively small.

2. Return the item to the owner and pay half the sum of the total hire purchase price (if the total of instalments paid have not reached that amount). This is called the half-rule. You do not have to pay half the hire purchase price immediately. Ending an agreement using the half rule may not always be the best solution.

For more information in relation to this topic, see www.citizensinformationboard.ie