Hire purchase (HP) explained

Hire purchase (HP) is one of the most common ways to buy a car on finance. You pay a deposit, usually about 10% of the value of the car, then repay the balance in fixed monthly instalments over a set period, and at the end the car is yours¹. The key feature that separates it from almost every other kind of borrowing is that you do not own the goods at any point until you have made the final payment: the finance company owns them throughout, and ownership only passes to you when the agreement is complete³.

That single fact drives most of the rules around hire purchase. It is why you cannot sell the car without the lender's written permission, why bailiffs cannot take it, and why the law gives you special rights to hand the goods back and cap what you owe. Those rights come from the Consumer Credit Act 1974, which covers most hire purchase agreements taken out by consumers in the UK⁴.

How hire purchase works: deposit, fixed payments, then ownership

A hire purchase agreement is arranged through the dealer or shop selling the goods, but the finance itself is normally provided by a separate finance company⁸. You pay an initial deposit, then repay the balance in instalments over a set period, and at the end you own the car¹. The deposit is usually about 10% of the value of the car².

The monthly payments are fixed for the term of the agreement, which makes budgeting straightforward: the same amount leaves your account each month until the agreement ends. Some agreements finish with an "option to purchase" fee, a final small payment that transfers ownership to you. In one worked example from debt charity guidance, the option to purchase fee was £5⁷. The fee is deducted from what you owe if the creditor repossesses and sells the goods instead⁹.

Because the payments are fixed and the term is set at the start, the total amount payable under the agreement is known from day one. That total matters more than the headline price of the car, because it is what the half-way and one-third rules are measured against⁵.

The thresholds of a hire purchase agreement: one third paid makes the goods protected, half paid caps what you owe if you end it early, and the final payment makes it yours.

You do not own the goods until the final payment

This is the defining rule of hire purchase, and every debt charity and official guide states it the same way: you do not own the goods until you have paid the full amount³. The goods belong to the seller or the finance company until your last payment¹². With a car, the finance company owns it until you have made the last payment⁸.

The practical consequences run in both directions, good and bad:

• You cannot sell the goods without the lender's written permission, because they are not yours to sell¹³.
• Bailiffs cannot take them to pay other debts, because they belong to the finance company, not to you¹⁵.
• The creditor can repossess them if you fall behind on payments, following set procedures that depend on how much you have paid¹⁷.
• You are the keeper of the goods while the agreement runs, responsible for insuring and looking after them.

Hire purchase is sometimes described as a secured loan, but debt guidance is clear that HP and conditional sale agreements are not really secured agreements in the usual sense: the item does not belong to you until all payments are made, so there is no charge over your property, just ownership that stays with the lender¹⁸. A related product, conditional sale, works the same way for ownership purposes: the goods belong to the seller until your last payment¹². The dedicated page on conditional sale agreements explains that variant.

What hire purchase costs: interest, deposit and fees

The cost of hire purchase is made up of three things: the deposit, the interest charged on the balance, and any fees, including the option to purchase fee at the end.

The deposit is usually about 10% of the value of the car². A bigger deposit means a smaller amount borrowed, which means lower monthly payments and less interest over the term. Some lenders offer hire purchase with no deposit, which the page on getting car finance with no deposit covers.

Interest rates and total costs vary between lenders. One firm cap does exist in a corner of the market: in Northern Ireland, credit unions' charges on hire purchase and conditional sale agreements are capped at 3% per month¹⁹. More generally, hire purchase agreements come under the Consumer Credit Act 1974, which since April 2008 covers new agreements even above £25,000 unless they are for business purposes⁵. The Act and the rules made under it govern how the agreement is advertised, what information must be given before signing, how early settlement is calculated and your right to withdraw, and the rules were deliberately designed so that consumers taking out hire purchase do not have lesser rights than consumers taking out other types of unsecured credit²⁰.

A worked example from debt charity guidance shows how the pieces fit together on a real agreement: the amount already paid, deposit plus instalments, came to £1,600, and the option to purchase fee was £5⁷. When budgeting, guidance is to include hire purchase payments in your household outgoings, and if the car is needed for work or mobility, to treat those payments as a priority, because missing them can mean losing the car²².

Balloon payments: lower monthly payments, bigger final bill

Some hire purchase agreements are structured with a balloon payment: a large final payment at the end of the term, which makes every monthly payment before it smaller. Debt charity guidance gives a worked comparison on the same £5,000 borrowed over 4 years: without a balloon, the agreement is 48 monthly payments of £104.17; with a balloon, it could be 47 monthly payments of £85.17 and a final payment of £1,000³.

The same borrowing split two ways: spreading it evenly, or pushing a large slice to the end.

The trade-off is clear from those figures: the balloon version costs about £19 less a month for 47 months, but then demands £1,000 in one go. If that final payment cannot be made, there are options. If the vehicle is not wanted any more, it can be returned instead of paying the balloon payment and there will usually be nothing more to pay, provided the half-way threshold described below has been reached³. Some agreements also allow the vehicle to be handed back rather than making the final payment¹⁰. The page on guaranteed future value and the balloon payment explains how these final payments are set.

Hire purchase or PCP: how each one ends

Hire purchase and personal contract purchase (PCP) are closely related, and the names are sometimes used loosely. Some creditors use the term personal contract purchase agreement to describe hire purchase agreements for vehicles, and HP agreements are sometimes called PCP agreements when they are used to buy a car⁵. Both are ways of paying for a car in instalments with the finance company owning the car until the end.

The difference is how the agreement ends. With hire purchase, you pay the full price of the car plus interest over the term, and at the end you own it outright once the final payment (and any option to purchase fee) is made¹. With PCP, the monthly payments cover only part of the car's value, and at the end you choose between paying a larger final balloon payment to keep the car, handing it back, or using any surplus value towards a new agreement¹⁰.

A third product, personal contract hire (PCH), is not a purchase at all: it is essentially a lease, where you rent the car for an agreed period and return it at the end, with no option to buy¹. The comparison page PCP or hire purchase: which suits you sets the two main products side by side, and the section pages on PCP and personal contract hire cover each in detail.

Who can get hire purchase and how to apply

Hire purchase is arranged at the point of sale: you choose the car at the dealer, and the dealer puts you in touch with a finance company, which is normally a separate company from the garage or dealership⁸. The finance company will run credit checks and affordability checks before agreeing the loan, in the same way as any other regulated lender; the page on loan affordability checks explains what lenders must look at.

Most consumer hire purchase agreements come under the Consumer Credit Act 1974, which is what gives you the termination and repossession rights described in the rest of this page⁴. Since April 2008, new agreements are normally covered by the Act even if you have borrowed more than £25,000, unless the agreement is for business purposes⁵. The rules for dealing with hire purchase and conditional sale are usually the same whether the agreement is a business or a household one²⁴.

Hire purchase is not only used for cars. It is also used for other equipment, including equipment for disabled people, where guidance notes that if you hire for long enough, the agreement should give you the chance to buy the equipment, and that you do not own the equipment unless you buy it²⁵. In some circumstances the creditor must give you a copy of the agreement at least seven days before you sign, so there is time to consider whether to go ahead²⁶.

Paying off early or selling the car during the agreement

Because the finance company owns the car until you have made the last payment, you cannot sell it without the lender's written permission¹³. Selling the goods without the creditor's permission can be a criminal offence²⁷. If the item is to be sold before the agreement finishes, the lender's permission is needed, and the usual route is to settle the finance first and then sell²⁸.

Paying the agreement off early is different from ending it. Early settlement means paying off everything you owe, and the rules on early settlement, including any rebate of interest, are set out in the Consumer Credit (Early Settlement) Regulations 2004²⁹. The page on paying off a loan early and settlement figures and the one on how a car finance settlement figure is worked out cover this in detail.

If the payments become unaffordable, the creditor may agree to reduce or stop the interest, give more time to pay, reduce or pause payments for a while, or work on a new payment plan. Reduced payments may be recorded on your credit file³. Free debt advice, described at the end of this page, can help you negotiate.

Ending the agreement early: the half-way rule

If you no longer want or cannot afford the goods, you have a right to terminate a regulated hire purchase agreement under Section 99 of the Consumer Credit Act 1974, at any time before the last instalment is due⁹. This is called voluntary termination, and it is a right, not something the creditor has to agree to.

The rules on what you owe when you terminate are set by Section 100 of the Act: you are liable to pay the amount by which one-half of the total price exceeds the sums you have already paid and sums already due, unless the agreement provides for a smaller payment³⁰. In plain terms, what you owe is capped at half of the total amount payable under the agreement, minus what you have already paid and what is already due⁵. If you have paid more than half, there is usually nothing more to pay³.

Two points catch people out. First, the 50% does not have to have been actually paid in order to terminate: the agreement can be ended before reaching half, and then the difference up to the half-way limit is paid, although some creditors say the 50% must be paid first, which is not the position in debt guidance⁵. Second, the creditor must be told in writing that the agreement is being terminated. If the request is made by phone, the creditor does not have to agree³. The wording matters: writing that you are "terminating under Section 99" is what brings the 50% limit into play.

Other things to know about terminating:

• The agreement can be ended at any time, but only if the creditor has not issued a default notice³.
• None of the payments already made will be returned³.
• Terminating the hire purchase agreement does not terminate a subsidiary insurance agreement; you remain liable for it⁵.
• The creditor cannot ask you to travel a long distance to return the goods³.
• If the agreement is ended by you, you will owe up to half the agreement, plus any arrears and reasonable charges if the car is damaged⁶.

The comparison page voluntary termination or early settlement of car finance helps you weigh handing the car back against paying it off, and voluntary termination: ending car finance early covers the process step by step.

Missed payments and repossession: the one-third rule

If you fall behind on payments, the creditor has the right to repossess the goods, following set procedures that depend on how much of the original agreement you have paid¹⁷. The creditor will usually issue a default notice after about three months of missed payments³.

The central protection is the one-third rule. If you have paid a third or more of the total amount payable, the goods become "protected goods", and the creditor must go to court for an order for the goods to be returned, unless you consent to the repossession⁶. If you have paid less than a third, the position is weaker: the finance company can take the car back without going to court if it is on a public road, or from premises where you have given permission to enter⁸.

If the creditor breaks the protected goods rule, for example by taking the car without a court order and without your consent when you have paid a third or more, the lender risks having to refund all the money you have paid under the agreement⁶.

After repossession, the creditor will normally sell the goods. If the sale does not raise enough to pay off the remaining debt, you will still owe the shortfall³. When the creditor terminates and repossesses, you will usually have to pay the full amount owed on the original agreement, minus what you have paid, minus what the creditor gets back from selling the goods, and minus the option to purchase fee⁹. If you give the goods back voluntarily instead, you will normally have to pay the full amount owed, minus your payments and minus what the creditor recovers from selling the goods¹⁰. The shortfall can be treated like any other non-priority debt, such as a credit card or loan³. The page on car repossession covers the process in full.

In Scotland, the law is unclear about whether a creditor has to get a court order to repossess hire purchase goods if you have paid less than one third of the total amount payable¹⁰. The page on loans and car finance in Scotland covers the differences.

Bailiffs cannot take goods still on hire purchase

Bailiffs (also called enforcement agents) can only take goods that belong to you. This means they cannot take goods on hire purchase agreements, because they still belong to the lender¹⁵. Official guidance lists items on hire purchase agreements, including cars, among the things enforcement agents cannot take¹⁸, and goods on hire purchase cannot be taken if the last payment has not been made¹⁶.

If a bailiff tries to clamp or take a vehicle you are still paying for on hire purchase, tell them you are still under an agreement and the car is not yours; they should stop¹⁵. Bailiffs must take reasonable steps to check who owns the things they take¹⁸. Bailiffs also cannot take things you need, such as your clothes, cooker or fridge, work tools and equipment worth less than £1,350, or someone else's belongings¹⁸.

The same ownership rule cuts the other way for household goods generally: household items on hire purchase cannot usually be taken without a court order, but motor vehicles often can be, because a car parked on the street is easier for a creditor to recover under its own repossession powers³. The page on what bailiffs can take and the debt section explain the wider rules.

Where the usual hire purchase rights do not apply

Not every hire purchase agreement carries the full set of rights. Some HP agreements are not regulated by the Consumer Credit Act, and you do not have a right to end these agreements early. This mainly affects older, high-value agreements, or agreements taken out by a business³.

The early settlement rebate rules also have a carve-out: the rebate entitlement in the Consumer Credit (Early Settlement) Regulations 2004 does not apply where a hire purchase or conditional sale agreement is terminated by the debtor under Section 99 of the Act²⁹. In other words, when you hand the goods back under the half-way rule, the settlement rebate rules do not come into play; the 50% limit in Section 100 is what governs what you owe instead³⁰.

Other edges of the rules:

• Consumer hire agreements (pure rental, with no purchase option) sit outside some protections: activities in relation to a consumer hire agreement are not financial services within the meaning of the Distance Marketing Directive³¹, and the Consumer Credit Act does not regulate certain consumer hire agreements, such as meters owned by electricity or water suppliers²¹.
• Complaints volumes give a sense of where problems arise: in the first quarter of 2026/27, the Financial Ombudsman Service recorded 39 opened complaints about hire purchase (non-motor, non-rent to own)²⁷.
• Some hire purchase agreements include a mileage cap, even though HP normally has none. In one Financial Ombudsman case study, an agreement clearly showed an annual mileage cap of 6,000 miles, allowing 18,000 miles over the three years of the agreement, and the customer had in fact driven 28,000 miles; because the cap was clearly shown in the signed agreement, the charge for exceeding it stood²⁸.
• If you go bankrupt, the hire purchase agreement may include a clause ending the agreement, in which case the lender can repossess the vehicle and sell it, though some lenders may allow you to keep the car; if the agreement ends before you are discharged, ownership of the vehicle passes to the official receiver, who may sell it or allow you to keep it depending on its value²⁶.

Where to get free help

If you are struggling with hire purchase payments, free and impartial help is available. StepChange, National Debtline and Business Debtline all publish detailed guidance on hire purchase debts, including how to terminate an agreement, how repossession works and how to treat any shortfall³. Citizens Advice covers hire purchase when buying a used car². Because a car bought on hire purchase that you need for work or mobility is a priority in your budget, getting advice early matters: missing payments can mean losing the car²².

If you have a complaint about how the agreement was sold or handled, you can complain to the finance company first and then to the Financial Ombudsman Service, which deals with hire purchase complaints, including complaints about PPI sold with hire purchase agreements²⁹. You can check whether your hire purchase or conditional sale agreement included Payment Protection Insurance, and a claim may be possible depending on the circumstances, for example if you were told you would not get the credit without it, or felt pressured into taking it³. The page on complaining about a lender or finance company explains the process.