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Hire purchase (HP) is one of the most commonly used methods to finance motor vehicles.
The agreement is structured with fixed monthly payments and a final nominal “option to purchase” fee on payment of which, the customer takes legal ownership of the vehicle from the finance company. Unlike personal contract purchase (PCP), no “balloon” payment is payable at the end if the customer wants to own the vehicle.
If the customer has a large deposit to put down, HP may be a better option for a customer than PCP.
The agreement is structured with regular monthly payments and a final “balloon” payment, being the estimated value of the vehicle at the end of the agreement, based on the agreed annual mileage and predicted wear and tear over the period. This is called the ‘Optional Final Payment’ (OFP), also sometimes referred to as the ‘Guaranteed Future Value’ or ‘GFV’.
At the end of the agreement, customers will have three options:
1 Pay the OFP and nominal option to purchase fee and own the vehicle outright;
2 Part-exchange the vehicle for a replacement. Any surplus after paying the OFP could then be used as a deposit for a new agreement;
3 Hand back the vehicle (for example, where the OFP is more than its actual value). If the annual mileage agreed at the start of the agreement is exceeded or if the vehicle is not in reasonable condition on its return, this may incur extra costs.
PCP monthly payments will be lower than for HP on equivalent terms. But overall interest charges will be higher on a PCP because a portion of the credit advanced (in the form of the OFP) remains unpaid until the end of the term.
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Please ensure that you are able to afford the monthly payments and that the time period you anticipate keeping the
vehicle is reflected in your finance product and payment period choices. For guidance on affordability click here.
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Philip Mair and Stuart Campbell - Autocentre Inverurie Limited
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