Hire Purchase Vs Car Loan: Difference between Car Loan and Hire Purchase Agreement
A car loan and hire purchase both could be used to purchase your car, but you should carefully understand how they work before using them.
Are you looking to take out a car loan? There are various types of ways to have your car financed. You can either take out a car loan, or you can consider car finance. A car loan is a personal loan, also called an auto loan, which involves borrowing money from a direct lender, while car finance involves two types of financing methods such as hire purchase and personal contract purchase. The prime difference between a hire purchase and a personal contract purchase is that you have the option to return the car at the end of the personal contract purchase.
At the time of buying a car, you might have to brainstorm choosing between a car loan and a car finance deal. Car finance deals are also common among buyers, but personal contract purchases are not so popular. This is preferred by those who operate a fleet of cars and have to renew cars after a short period of time.
If you are looking to purchase a car and are unable to decide between a car loan and a hire purchase, you should understand the difference between both. Understanding how they work will help you decide whether you should take out a car loan or a hire purchase deal.
What is a car loan?
A car loan is a personal loan. It involves borrowing money from a direct lender. It is also called an auto loan. While car loans are considered personal loans, your car will be served as collateral. You will not be able to sell your car unless you discharge your debt. You will be free to use your car the way you want, but since your lender will have the upper hand, ownership will be transferred to you after the car loan is settled.
A car loan could be expensive because there is no additional collateral. A car is a depreciating asset, and it is likely that your lender would not be able to cover their money by repossessing it. Therefore, they will charge high interest rates. In order to qualify for a loan, you need to ensure that you meet the following eligibility criteria:
You must have a good credit score
A car loan could be challenging to secure if your credit score is not up to snuff. Lenders would be indisposed to lend you money when they see that your past payment comportment is not stellar. A good credit rating helps you establish a trust. As it will not call your credibility into question, your lender would be willing to easily approbate your application.
If your credit score is poor, your lender will charge high interest rates. This is because the risk is too high. No lender would offer you competitive interest rates when they find your credit report is full of credit inquiries, missed payments and defaults.
One of the biggest challenges with a poor credit score is that you will have to arrange a higher amount of deposit. Normally, you are required to submit 10% of the car’s value as a down payment, but if your credit score is bad, you will have to make it double.
Your financial situation must be strong
Your financial condition must be strong to secure an auto loan. If you are earning a high amount of money, you will be able to prove your repaying capacity. After a credit score, your repaying capacity is the most important factor that lenders would like to take into account.
What is a hire purchase?
Are you looking to get a car finance deal? If so, a hire purchase would be better than a personal contract purchase. A personal contract purchase costs more than a hire purchase because you would end up paying a balloon payment in order to get the title. Though monthly payments for personal contract purchases are smaller than hire purchases, you would have paid more than the depreciating cost. It means paying a balloon payment is like an additional payment that you make to own a car.
A hire purchase deal involves a contract that allows you to use the car the way you want, but you will receive ownership at the end of the term. A deposit size of up to 10% is required to be eligible for hire purchase. In order to qualify for this deal, you must have a good credit score.
If your credit score is not stellar, you would still be able to qualify for hire purchase, but it is vital to note that high interest rates will be charged.
Whether you are looking for a car loan or a hire purchase, it is always suggested that you consider both pros and cons.
Difference between car loans and hire purchase agreements
Here is the difference between auto loans and hire purchase agreements:
Ownership
You own your car from the moment you purchase it, but your lender will have the upper hand. It means you cannot sell your car until you have settled your debt. However, the hire purchase agreement will not let you have the title of the car unless the agreement comes to an end.
Down payment
Both an auto loan and a hire purchase involve a down payment, but the amount varies.
|
|
Auto loans |
Hire purchase |
|
If you have a good credit score |
10% |
From 10% to 15% |
|
If you have a poor credit rating |
From 15% to 20% |
From 20% to 25% |
Flexibility
Car loans are more flexible than hire purchases. Your lender gives you the right to sell your car at any point in time, provided you have settled your outstanding dues. However, it might cost you early repayment fees. Hire-purchase deals do not offer that much flexibility. You will have to make fixed monthly payments until the agreement ends. It does not come with a clause about selling your car at any point until the agreement comes to an end.
The bottom line
If you are looking to purchase a car, you can consider either an auto loan or a hire purchase. Before choosing any option, you should carefully weigh up their pros and cons.
