What Is Hire Purchase (HP)? A Simple UK Guide

Hire Purchase (HP) is a traditional UK vehicle finance option that allows you to pay for a car in fixed monthly instalments, with ownership transferring to you at the end of the agreement.

Unlike leasing or PCP, Hire Purchase is intended for drivers who plan to keep the vehicle for five years or longer.

Hire Purchase also differs from a personal loan by offering additional legal protections, including termination and repossession rights.

This guide outlines how Hire Purchase works, its main features, and the obligations to consider before entering into an agreement.

What Is Hire Purchase?

Hire Purchase is a regulated vehicle finance agreement that allows you to use the car while paying in instalments. Ownership transfers to you only after the final payment, and until then, the finance company holds a legal interest in the vehicle.

During this period, the car can be registered in your name as the keeper.

Because the vehicle is used as security, Hire Purchase is subject to specific consumer protection rules under UK law. Car parked on a residential driveway, illustrating hire purchase car finance and vehicle ownership in the UK

Car parked on a residential driveway, illustrating hire purchase car finance and vehicle ownership in the UK

How Hire Purchase Works in Practice

A typical Hire Purchase agreement follows these steps:

Initial deposit
You typically pay a deposit at the start, which may consist of cash and equity from a part-exchange vehicle.
Monthly payments
You make fixed monthly payments over an agreed term, usually between two and five years. These payments are normally interest-bearing, and you pay interest on the total amount borrowed.
Use of the vehicle
You may use the vehicle for everyday use, but you must keep it insured and in reasonable condition as required by the agreement.
End of the agreement
Once all payments are complete or the agreement is settled, ownership transfers to you.

Unlike PCP finance, there is no final balloon payment, though a small ‘option to purchase’ fee may be required with your last payment.

Core Features of Hire Purchase

Ownership

You do not own the vehicle during the term of the agreement.
Ownership transfers automatically after the final payment.

Monthly Payments

Fixed monthly payments.
Payments are based on the full value of the vehicle, and not on usage or depreciation.

Mileage

No contractual mileage limits are written into the HP agreement.
Excess mileage charges do not apply, unlike with PCP or lease.

Vehicle Condition

The vehicle should be kept in reasonable condition.
Normal wear and tear is expected.

End-of-Agreement Outcome

The vehicle becomes yours to keep.
No return or handback process.

Hire Purchase can be more suitable for people doing a higher mileage as they are not penalised for this, like they may with PCP or lease, where higher monthly payments, or excess mileage charges may apply.

Voluntary Termination Rights (“The Half Rule”)

A key feature of Hire Purchase is the right to voluntarily terminate the agreement under the Consumer Credit Act.

This is often called “the half rule.”

How voluntary termination works

You may end the agreement once you have paid 50% of the total amount payable.
The total amount includes:
- Deposit
- Monthly payments
- Any interest and fees
If you have not paid 50%, you may need to make an additional payment to reach this amount.

After you exercise voluntary termination:

You can return the vehicle.
You do not need to make further payments.
You must take reasonable care of the vehicle.

This protection does not exist with personal loans.

Exercising your voluntary termination rights should not affect your credit score or borrowing ability. (See an expert guide on Voluntary Termination on HP or PCP).

Repossession Rights (“The Third Rule”)

Hire Purchase agreements also provide repossession protections, often called “the third rule.”

What this means

Once you have paid one-third of the total amount, the finance company cannot repossess the vehicle without a court order.
If you have paid less than one-third, the vehicle may be repossessed without court involvement.

This offers an extra layer of legal protection not available with unsecured borrowing.

How Hire Purchase Differs from a Personal Loan

While both Hire Purchase and personal loans can be used to buy vehicles, they operate differently.

Key differences include:

Security: HP is secured against the vehicle; a personal loan is not, it is secured against you.
Ownership: The lender retains a legal interest in the vehicle under HP until you complete the payments.
Legal protections: HP includes voluntary termination and repossession safeguards
Early exit: Personal loans must be repaid in full regardless of circumstances.

Personal Loans are not the same as Hire Purchase, and may offer fewer legal protections and features. Personal Loans can, in many cases, offer a lower interest rate than HP.

Likely Advantages of Hire Purchase

Clear path to ownership
No mileage limits
Fixed monthly payments
Legal protections under consumer credit law
Suitable for drivers planning to keep the vehicle

Likely Constraints of Hire Purchase

Higher monthly payments than PCP or leasing
You do not own the vehicle until the end.
Early settlement may still involve interest.
The vehicle is at risk of repossession if payments are missed.

Hire Purchase offers certainty but requires a long-term commitment.

Who Hire Purchase May Suit

Hire Purchase may be suitable for drivers who:

Want to own the vehicle outright at the end.
Plan to keep the car long term, or are not sure how long they may keep the vehicle.
Prefer fixed payments without mileage restrictions.
Value the legal protections built into HP agreements.

Hire Purchase may be less suitable for those who change vehicles often or prefer lower monthly payments.

How Hire Purchase Can Affect GAP Insurance

How you finance a vehicle can affect your financial position if it is written off or stolen.

With Hire Purchase:

Your motor insurer usually pays the current market value.
The outstanding finance balance may be more than the insurer's payout.
The market value settlement may be far less than you originally paid, or what it may cost to replace the vehicle.
This difference can create a financial shortfall.

As you can own the vehicle at the end of a hire purchase agreement, there are several GAP Insurance products to consider. These would include Return to Invoice GAP, Vehicle Replacement GAP and Finance GAP.

Contract Hire/Lease GAP is not applicable because you can own the vehicle with hire purchase finance. You would need a dedicated Lease GAP Insurance policy for that kind of arrangement.

For more information, see our guide to the different types of GAP Insurance to better understand the options.

Summary

Hire Purchase is a simple way to spread the cost of a vehicle and own it outright at the end of the agreement.

It provides certainty, no mileage limits, and key legal protections, including safeguards for voluntary termination and repossession.

Understanding how Hire Purchase works, and how it differs from PCP, leasing, and personal loans, can help you see which source of funding suits you best.

We hope this brief rundown helps.

This article is for general guidance only and does not advise on the suitability of Hire Purchase for your individual circumstances. Always review the full terms of any agreement before proceeding.

Reviewed by
Mark Griffiths, Founding Director and GAP Insurance expert
Last reviewed: 16th January 2026