Hire Purchase & rent-to-buy explained

Does hire purchase offer a good deal? - Check out our cost comparison to see why we think not.

What is hire purchase (HP) and rent-to-buy?

A hire purchase, or rent-to-buy, agreement is a mechanism for borrowing money in order to make a purchase of a good that you cannot afford to pay for out right. A hire purchase agreement is a form of secured loan that gives the lender certain rights over the borrower by their entitlement to repossess the good in certain circumstances, until the HP agreement has been completed.

Hire purchase agreements are governed by the Consumer Credit Act 1974, and the goods hired are governed by the Supply of Goods (Implied) Act 1973.

Many people use hire-purchase to buy large items such as cars, household appliances and furniture. Some of the biggest high-street names in this area include BrightHouse and CashConverters.

With a HP agreement the goods are hired to the borrower for a specified period of time, in which the consumer will have to pay weekly or monthly payments towards the total amount payable. The total amount payable is based on the cash price of the good, plus interest over the period of agreement and any additional charges which may be levied on top.

The goods remain the property of the lender until the HP agreement has been completed in full. Therefore, as the product is not officially the borrower's until this point, you are not authorised to sell the product on to a third party and you have to abide to the terms outlined in the HP agreement. When you have completed all the payments under your agreement, you may (in writing - and within a 30 day period) exercise the option to have title (ownership) of the goods transferred to you. If you do not wish to take ownership of this product you can return the goods, and you may be eligible to receive a discount towards a new HP agreement.

If you fail to meet the terms of the HP agreement, the lender may be authorised to take back the product.

Hire-purchase is generally a very expensive way to purchase an item and so you should always exercise caution before going down this route. Generally the cheapest way to make such purchases is to save up and buy the item outright from a high-street or internet retailer. Whilst this requires a bit of patience is does save you hundreds of pounds and therefore allows you to buy more in the long run! Check our cost comparison for more details.

What to do if you are struggling to meet your repayments?

If you fall behind with your repayments, the company that you have the HP agreement with may be able to repossess the good you have hired from them.

You are likely to be contacted by your creditor as soon as you miss a payment; however you are not legally required to respond to any contact by the creditor unless it is in writing. You are also likely to be subject to some form of penalty charge for the late payment.

If you have paid in excess of a third of the total amount payable under the HP agreement, the creditor is unable to repossess your product without a court order, unless you authorise the creditor to remove the goods. It must be noted, that even if you haven't paid a third of your agreement, the creditor will have to receive an order from the court or your consent to remove the good from your property. If the property is in a public space, the creditor is authorised to repossess the good without such agreements.

The creditor cannot legally remove the good until they have:
1. Issued you with a default notice in writing.
2. Given you at least 7 days to meet the required terms of the agreement.
3. Applied for and been granted a court order for the repossession of the good.

If the creditor removes the good from your premises without your authorisation after you have paid in excess of a third of the total amount payable, you are entitled to a total refund for the sum of the money you have paid under the agreement.

For more information on your rights, phone the Insolvency Helpline on 0800 074 6918, or contact Consumer Direct on 08454 04 05 06.

How do I end my HP agreement?

You may decide that it is in your interest to end you HP agreement if you are struggling to meet your repayments.

If this is the case, you have the right to terminate your HP agreement under the Consumer Credit Act 1974 at any time before your last instalment is due. However, you will be unable to terminate your HP agreement if the creditor has already terminated the agreement or if the full balances has become payable.

If you choose to terminate your agreement voluntarily you will have to pay half of the total amount payable, minus the payments you have already made under the agreement and any sums that you have paid, such as a deposit, and sums that are due, such as missed payments.

You must inform the creditor in writing in order to terminate your agreement voluntarily. Keep a copy of the letter in case you have to prove the voluntary termination at a later date.

If you fall behind with repayments, the creditor must issue a default notice under the Consumer Credit Act 1974.The default notice will highlight the payments that are due and will give you a date by which the arrears must be paid. If you fail to do this, the creditor will terminate your agreement and as a result the full balance of the agreement will now be payable to the creditor.

If you feel like you are going to struggle to meet your repayments, it is likely to be in your interest to terminate your agreement.

Should I take out service cover?

Some creditors will offer you a form of service cover to insure your products against any costs incurred when a product may need to be repaired. Despite often being described as an ‘optional' cover, many companies effectively include this automatically in your agreement. If you have signed up to a HP agreement with some form of optional service cover, we would strongly advise that you assess whether you need it because:
• Service cover offered by a creditor tends to be significantly over priced.
• Most products you take out on HP agreement will be covered by a manufacturer's warranty, which are free of charge. You may also have the option of taking out an extended warranty which tends to be a fraction of the price.
• If your product develops a fault, you are able to return the goods to your creditor with no penalty charge once you have paid over half of your total amount payable.

Should I take out accidental damage cover?

Creditors may offer some form of damage cover to insure your products against any damage caused by fire or accidental damage. As with the service cover offered by many creditors, this tends to be hugely overpriced, almost obligatory and does not cover you for much.
If you choose to take out service and damage cover this will add a significant amount to your HP agreement, and there will often be cheaper and more comprehensive cover on offer elsewhere.

Useful Links

-Insolvency Helpline have put together a factsheet on Hire Purchase agreements.

-Visit www.consumeractiongroup.co.uk if you would like to discuss problems you have had with a HP provider .

If you have had any problems with a Hire Purchase agreement please let us know at office@creditaction.org.uk.

Write a comment

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G Tyler

Welcome Finance HP Agreement
Mon September 28, 2009, 20:11:53

I have a car coming up to 3 of its 4 year HP term, however, checking the documents there appears to be no signature on behalf of welcome (the box is empty) and no issued or commencment date.

Is this still legally binding?