HP/ Lease Purchase

Interest rates for this method of finance have never been as attractive for nearly 50 years.

Hire Purchase (HP) has become the most common method of funding new and used cars during the last half of the 20th century and most people understand the principal. However, whilst it was relatively simple for an individual to calculate that if they were charged a flat interest rate of say 10% per annum, this would cost £10.00 interest for every £100.00 borrowed. In an effort to ensure people were not charged high interest charges, the Government in its wisdom decided to enforce rules stating that the APR (Annual Percentage Rate) for all loans must be clearly displayed on all finance offers. (Applicable to loans regulated by the consumer credit act currently under £25k). The result is that even after nearly 20 years of enforcement the average member of the public cannot work out how the APR is calculated.

Basically APR is calculated by taking the interest charges as a percentage of the original amount borrowed and applying factors which take into account the fact that regular sums (normally monthly) will be being paid and effectively reducing the total of the original amount borrowed. A computer is needed to calculate this accurately. But as a "rule of the thumb" the lower the APR the lower the true rate of interest being paid.

Look out for additional charges that will be levied, such as Documentation Fees (Doc Fees) and "Option to Purchase Fees". Whilst nearly all finance houses levy these, the amount can vary significantly. The easy way to check is to look at the "Total Amount to Pay" box, which must be on all regulated agreements.

Watch out for "CPI" Credit Protection Insurances, Early Termination Insurances, GAP Insurances (which pay for shortfalls in debt and insurance pay-outs if the car is accidentally written off). All of which whilst offering an element of protection, the charges can often be horrendously expensive. But becoming ever less popular due to the lack of cover for unknown depreciation risks as available with Contract Hire / Contract Purchase agreements.