What You Need to Know About Hire Purchase

Hire purchase is probably the most common way of paying for high ticket items like cars, furniture and computers. But like any credit deal, it can have its pitfalls and you need to think carefully before committing yourself.

The Basics

When you buy items with a loan or credit card, whatever you buy belongs to you straight away. However, that's not true with HP; you don't own the goods until you've paid back all the money you owe. Your contract is with a finance company which owns the goods until the final payment is made and which can repossess the goods if you don't keep up your repayments. If there's any damage to the goods, you'll be responsible.

You should always look at other options first. Maybe you can get a better rate through a loan, or even another HP company. Compare the APR (annual percentage rate) and the total amount you'll end up paying (fees and charges, too).

Your Rights

Before you sign an HP contract, by law the lender must give you "pre-contract information" to take home and read.Always read the contract thoroughly before you sign it and never sign unless you're happy that you understand and agree with everything - it should be worded in plain language. If the agreement is for less than £25,000 and doesn't include all the financial information, you'll find that the lender may need to get a court order to make it enforceable.

Although your goods can be repossessed if you don't make your repayments, you have protection there too. If you've paid one-third or more of the total amount due, then the lender will need a court order for repossession. Moreover, he'll need a court order to enter your home.

Unfair Terms

Unfair terms are those which favour the lender over you and you need to be alert for them. Something saying you'll have to pay the full amount if you're late with one payment, or making charges for late payment reminders could be classed as unfair terms, because they're heavily weighted against you. If you find any like this in the agreement, challenge them and you might well want to think twice before signing the contract. If you've signed an HP contract which you think contain unfair terms the best thing to do is to seek advice.

You can complain to the Office of Fair Trading (www.oft.gov.uk) about unfair terms. They'll need a copy of the contract and can recommend if you should take action. Ultimately, it's up to a court to decide if a particular term is unfair.

Insurance

Something that's regularly offered is payment protection insurance, also known as PPI. The idea is that if you're ill or become unemployed, the insurance will make your HP payments for you. However, this is optional - you don't have to take it. Before you agree to it, read the exclusions very carefully - if you're self-employed, for example, you might not be covered. Even if you decide you want PPI, you don't have to include it in the credit deal. Instead, you pay the premium in cash, which often proves to be much cheaper.

Ending The Contract Early

There are a couple of reasons you might want to end the HP contract early. The first is that you want to pay it off ahead of schedule. That's fine and if you look at your contract, it should give examples of how much an early pay-off costs. But you'll still need to contact your lender for the exact amount and you'll also have to pay the credit for whatever insurance you've taken out.

The other reason is because you can't afford the repayments and here things become a little more complicated. You can only end your agreement early if it's for less than £25,000 and you've already paid at least half the total (the figure should be shown in a box on the front of your contract). Write to the lender and tell him what you want to do - terminate the agreement and return the goods. From that point you'll only be liable for any payments you've missed, the credit you took out for any insurance and for any damage to the goods. You shouldn't be charged to return the goods. If you have to physically take them back yourself, then it should be somewhere "within a reasonable distance of your home."

Problems

If you start having financial problems, the first thing to do is talk to your lender. It's possible he'll be willing to renegotiate the deal for you. In some cases though, lenders will only accept full payment. If that happens, they might take you to court, where you can always ask for more time to pay, if you really want to - although frankly, you might be better off allowing repossession.