Having hire purchase debt can be a worry, especially if it is for a car you need for work. But you can talk to your lender about options that will help you get back on track.
Hire purchase (HP) is a credit agreement where you hire goods while buying them (a car, a laptop, a television). You do not own the item until you have made the final payment. Personal Contract Plans (PCPs) are also classed as hire purchase agreements.
Main features of hire purchase agreements
- 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.
- You can take out a hire purchase agreement with a bank or other finance company.
- Hire purchase can also be arranged through a retailer or a garage acting as an agent but must be authorised by the Competition and Consumer Protection Commission (CCPC). The money is owed to the finance company and not the retailer or garage.
- You usually pay an agreed amount in monthly payments.
- Agreements usually last between 2 and 5 years.
- Some HP agreements have a balloon payment at the end of the agreement which is normally higher than your usual monthly payments. Personal Contract Plans are an example of this.
- Hire purchase is regulated by the Consumer Credit Act 1995.
- If you do not keep up the repayments, the item can be taken back, but there are rules the lender must follow and there are other options.
- You have responsibilities to the finance company, such as telling them where the goods are.
- You have the right to end the agreement at any time.
Personal Contract Plans (PCP)
Personal Contract Plans (PCP) are a specific type of hire purchase agreement offered by car dealers as a way to pay for a car. Like standard hire purchase plans, the car is sold by the dealer and the credit provided by a finance company.
In a PCP contract, you pay a deposit and continue to make regular instalments, usually over 3 years. You usually make a large lump sum payment at the end of the contract to purchase it.
At the end of the contract 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 the final payment is made. You must stick to certain restrictions on usage and maintenance, such as mileage limits and servicing obligations.
PCPs can seem very attractive because they usually have very low monthly repayments but they can be very complex compared to other types of car finance. You can find out more about Personal Contract Plans from the CCPC.
Do I have a consumer HP agreement?
Start by checking your contract to find out if you have a standard hire purchase debt or a personal contract plan or whether it is a loan agreement or hire agreement. Check also if your agreement is a consumer HP or for business. If your HP was taken out for business purposes, it is not regulated by the Consumer Credit act 1995 but you can rely on your contract.
Ask your lender for a copy of your contract if you cannot find it. You can use our sample hold letter. You can also send your own letter if you do not want to alert the creditor to your financial difficulties just yet.
If you have a loan agreement you can read more about struggling with bank loans and deal with it as a secondary debt.
What happens if I don’t pay?
The lender has the right to take back the goods when you are in arrears, but must follow the rules of the Consumer Credit Act 1995 and the terms of your agreement.
When you are in arrears, the lender can only take back the goods without a court order if you have paid back less than one-third of the total hire purchase price, and only then after sending you a default notice and giving you 21 days to put things right.
The total HP price: The total HP price is made up of the cash price of the goods, plus interest and other charges such as document and purchase fees. You need to look at your contract for these figures.
The one-third figure: One-third of the total HP price is made up of repayments made, any deposit that you paid at the start of the agreement, the value of any trade-in, any lump sums made and any documentation fees paid. You need to look at your contract and your account statements to figure out if more than one-third has been paid.
If your goods are taken back, you will more than likely still have a debt to pay. How much this is will depend on your contract. Some creditors will sell the goods and bill you for the shortfall, but they must calculate a reduction in interest charges because the agreement ended early. Other creditors will apply the ‘half rule’ calculation, which means you still owe up to half the hire purchase price and could also be billed for repairs to damage that isn’t reasonable wear and tear. So it really is important to pay this debt if you can afford to. You can contact MABS for free, independent and confidential advice if you have received a default notice and want to know your options.
If you have paid one-third or more off the total hire purchase price, the owner cannot repossess the goods without taking legal action. If this one-third rule is broken by the owner, you are entitled to end the agreement and can ask for a refund of all payments made. If this happens, get legal advice. You can contact Free Legal Advice Centres for legal advice if you can’t afford your own, or contact MABS for free, independent and confidential advice on your options.
Tip: Watch out for some creditors who may try to take back their goods without following the rules by asking you to sign a voluntary surrender form.
What are my options for tackling HP debt?
Depending on your financial situation you may be able to reach an agreement with your creditor to keep your goods or find another solution. Always check if you have payment protection insurance cover. Otherwise, you may be able to:
Pay extra to clear your arrears
Depending on your financial situation, you may be able to pay extra each month or pay a lump sum to bring your arrears up to date. If you are not too far behind on your repayments, you could do this without contacting the creditor. Otherwise, follow our next steps.
Reschedule repayments to an affordable amount
If you cannot afford full payments, you may be able to agree a repayment plan with your creditor to pay smaller amounts over a longer time. It can be confusing to keep track of how much has been paid or the value of any trade-in when new contracts are signed. So if you are asked to sign a new contract, make sure that money paid to date and any trade-in value goes towards the one-third and the half rule figures. You are also due a reduction in interest charges for any contracts ended early. You should also check if you have payment protection insurance cover.
If your HP is for a car, consider arranging to trade down
If you cannot afford to keep up with payments, your creditor may agree to a trade down arrangement to lower the costs. This must be approved by the finance company as the owners, and not the garage. Check the figures to make sure you are not worse off in the end.
Get permission to sell the goods to pay the debt
Some finance companies will give you permission to sell the goods to pay the debt. Whether this is a good solution or not will depend on the value of the goods and the amount of debt outstanding. You may get a better price than having the goods taken back and sold at auction. The original seller may buy the goods back from you, but shop around to get the best price.
You are due a reduction of interest charges if the agreement ends earlier than planned. If you are in very difficult circumstances, your creditor might agree to accept this payment as full and final settlement. You will need to get permission and any settlement agreement in writing beforehand.
Hand back the goods using your right to ‘statutory termination’
Under section 63 of the Consumer Credit Act 1995, you have the right to put an end to the HP agreement at any time.
- You do not have to wait until you have cleared arrears
- You do not have to wait until you have paid half
- You do not have to wait until you owe half
- You do not have to meet any other conditions
But think carefully before you use this right because you may still have a large debt afterwards and you will have no goods. You can contact MABS for free and independent advice if you are unsure what to do.
Here’s how to exercise your right to a statutory termination.
- Write to your creditor saying you want to terminate the agreement under section 63 of the Consumer Credit Act 1995.
- Send your letter by registered post (and e-mail if you have an address).
- Let your creditor know if there is no damage and you have taken reasonable care of the goods. It is useful if you can take photographs of the goods. If it is a car, take photos inside and out, or better still if you can afford it, get a garage report.
- Let the creditor know if you are willing to deliver the goods to an agreed place to avoid collection costs.
- Get a written receipt for return of the goods. Be careful not to sign a voluntary surrender form.
The creditor will then calculate how much you owe using the half rule calculation.
The half rule calculation
If you have paid less than half of the HP price, you will owe the difference between what you have paid and half of the total HP price of the goods, plus any arrears due that bring the amount over half. You will also owe the cost of repairing any damage beyond normal wear and tear.
If you have paid half or more of the HP price, and are not in arrears you will owe nothing more, unless there is damage beyond normal wear and tear. You do not receive a refund for any payments above half of the total HP price.
If you have paid half or more of the HP price, and you are in arrears you will owe arrears up to the date of termination. You will also owe the cost of repairing any damage beyond normal wear and tear.
This calculation works out best for agreements where close to half of the total hire purchase debt has been paid and there are no arrears or they are low. For examples of how the half rule works in practice, take a look at the CCPC leaflet, Ending a hire purchase agreement (pdf)
Hand back the goods by voluntary surrender
You can hand back (voluntary surrender) the goods, but beware, because you are unlikely to know how much you will owe afterwards. Usually in the case of a car, it is sold at auction and the sale price taken from what is left under the contract and you will owe the rest. The sale price can be much lower than if you got permission to sell the car yourself. If your car has been sold in this way, ask for evidence of the sale price. You should also get a refund of interest for ending the contract early.
Some creditors will call to collect goods and ask you to sign a voluntary surrender form. In some cases, the remaining debt can work out less than under the half rule.
Ask for a copy of the form and contact MABS for advice on your rights and options before you sign.
If you cannot reach an agreement, your creditor may choose to take back the goods and bill you for the rest of the money owed.
Explore personal insolvency options
If you are unable to pay your debts as they fall due you can look into Personal insolvency options. Contact MABS for free and independent advice if you want to discuss these options in more detail.
It is likely you will want to treat your HP debt as a priority debt if, for example, it is for a car that you need for work. This is because the lender can take back the car or goods if you do not keep up your payments.
It is your responsibility to pay your credit agreement if you can, but you also have rights by law. You can check if your contract complies with the consumer credit act. In summary the contract must be:
- In writing
- Signed by you and any other party to it
- Personally handed to you and any other party or sent within 10 days
If this rule is broken, the agreement is unenforceable and a creditor cannot demand payment. You can read more about what should be in a HP agreement. You can also find out more general information about what to check for in your contracts and statements.
The garage or shop does not actually provide the loan to you, but acts as an intermediary for the finance company. They must be authorised by the CCPC. You can check the register of authorised credit intermediaries to see if they were authorised or not.
You also have obligations to your creditor. You must take reasonable care of the goods or pay later if you don’t end up buying them. You must tell the creditor where the goods are if asked. You must not sell the goods without permission as they will still belong to the creditor and not to the person buying them. Your contract terms and conditions will tell you any other responsibilities you have.
Before you can decide which option might work best for dealing with your HP debt, you will want to know how much you can afford to pay. If you have just this debt, you can use our My Budget tool to work out how much you have coming in and going out and what you have left over if anything to offer off your arrears. You can also read more about managing money and contacting your creditor before making an offer.
If you are struggling to sort out several debts you can find out what to do next in our tackling debt pages. You can read more about:
- Tips for your tackling debt journey
- Tips for contacting creditors
- Dealing with replies to your offers
- Your rights about how your creditors can demand repayment
- Keeping track of your finances after an arrangement is in place
Need some advice and support?
If you get stuck along the way or just want some free and confidential advice and non-judgmental support contact MABS or read more about how MABS can help.
If you decide to contact MABS, it would be useful to note all your questions and have your most recent letters, emails or court documents from your creditors to hand and any credit agreements (contracts) if you can find them.
You can also arrange to email either your My Full Financial Picture or My Financial Statement for a MABS Adviser to look at before your appointment if you wish. But even if you don’t have this information, still make the call and MABS will help!