Hire purchase agreements

A hire purchase (HP) agreement is a credit agreement. You hire an item (for example, a car, laptop or television) and pay an agreed amount in monthly payments. You do not own the item until you have made the final payment. Personal Contract Plans (PCPs) are a type of hire purchase agreement.

You should know:

• Some HP agreements have a balloon payment at the end of the agreement which is normally higher than your usual monthly payments
• 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
• If you do not keep up the repayments, the item can be seized
• You have the right to end the agreement at any time

You can take out a hire purchase agreement with a bank, building society or finance company. Firms providing these services must be authorised by the Central Bank.

Hire purchase can also be arranged through a retailer. If you take out a HP agreement with a retailer, the store or garage is not usually providing the loan. It is acting as an agent for a finance company and will earn commission from the finance company for arranging the loan. This is called being a credit intermediary and the agent must be authorised by the Competition and Consumer Protection Commission (CCPC) to do this. You can check the Register of Credit Intermediaries to see if the agent is authorised.

Hire purchase agreements usually last between 2 and 5 years. Most HP agreements last 3 years. You should read a hire purchase contract very carefully before committing yourself to any agreement.

Hire purchase agreements are covered by the Consumer Protection Code which gives you rights when you buy a financial product. Hire Purchase is regulated by the Consumer Credit Act 1995.

Personal Contract Plans (PCPs)

This is a specific type of hire purchase agreement offered by car dealers to pay for a car. In a PCP contract, you pay a deposit and continue to make regular instalments, usually over 3 years. There is usually a large lump sum payment at the end of the contract.

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. It is important to understand all the terms and conditions before you sign up for a PCP. You can find out more about PCPs from the Competition and Consumer Protection Commission (CCPC).

To calculate the real cost of a hire purchase agreement:

1. Find the total hire purchase price
2. Find the price of a cash purchase of the same item
3. Deduct the cash price (2) from the total hire purchase price (1)

Example: A garage offers two prices for the same car. The car will cost you €12,000 if you pay in full with cash. Alternatively, the car will cost you €17,000 if you want to pay in instalments through a hire purchase agreement.

In this example, the hire purchase cost is €5,000 (€17,000 - €12,000). That is, it will cost you €5,000 extra to hire the car for a period of time (and eventually to own it), rather than to buy it outright for cash.

Different lenders have different hire purchase costs. Some will quote an APR (Annual Percentage Rate). This can help you to compare hire purchase costs. It may be misleading to compare a hire purchase APR with that of a normal bank or credit union loan. This is because you are paying for the hire of the goods. Unlike a loan, you do not own them until the last instalment of the HP agreement has been paid.

There is a maximum interest rate of 23% APR for hire purchase agreements since 16 May 2022.

If you would like independent information or help understanding the terms and conditions of a HP agreement (or any other loan), you can contact the CCPC. If you are struggling with a HP debt, you can contact MABS for free and independent advice.

Hire purchase agreements may also involve additional fees and charges. These fees and charges vary, but may include:

• Documentation fees
• Penalty fees for missed or late payments
• Interest surcharge for missed repayments
• Completion fee for the transfer of ownership to you – sometimes you have to pay a balloon payment much higher than your usual monthly payments
• Rescheduling charge – if your lender agrees to change the loan terms
• Other charges – you could be charged for repossession costs or for failure to take reasonable care

A balloon payment has the effect of postponing part of the costs until after the loan. This means that in the earlier months and years, you are paying less off your loan than you would for a bank or a credit union loan. You must pay the balloon payment to clear the loan and to become the legal owner.

A hire purchase agreement is signed by both you (the hirer) and on behalf of the owner (the finance company). If there is a retailer involved, for example, a garage, it also signs the agreement and supplies the items.

The hire purchase must include the following details:

The agreement

• The words "Hire Purchase Agreement" which must be stated clearly and in a prominent place on the agreement form.
• The names and addresses of all the parties to the agreement.
• A statement that you have the right to withdraw from the agreement within 10 days of receiving a copy of the agreement. This is known as a cooling off period. Often you are asked to give away this right by signing a waiver. You do not have to sign this waiver.

The goods

• Details of the item covered, for example, a car or computer.
• The cash price of the item.
• A statement that you must tell the owner (finance company) of the location of the item.

The costs

• The hire purchase price. This is the total amount you will pay over the life of the loan. The hire purchase price is the monthly payment or instalment multiplied by the number of instalments which you have to make.
• The amount of each instalment you must pay. Sometimes the final instalment is much larger than all the others (a balloon payment).
• The date you must pay each instalment.
• The fees, charges, and penalties that apply.
• The Annual Percentage Rate (APR) charged (for agreements made since 16 May 2022).

Unless all of these requirements are contained in the agreement, the agreement may not be legally enforceable.

You should try to take some time to read all the terms of the agreement and make sure you understand them fully before you sign up.

You can end the agreement at any time by giving notice in writing to the owner of the goods (the finance company). This is a legal right under the Consumer Credit Act 1995. You should be aware that breaking a hire purchase contract before its normal end date usually involves penalties.

You have two options:

1. Buy the item earlier than planned. You can own the item by paying the difference between the amount already paid and the total hire purchase price. There is usually a reduction on the overall amount due as you are paying the loan off earlier than planned. This reduction is calculated using a recognised formula for early loan repayments. However, the amount of any reduction is relatively small.
2. Return the item to the owner and pay half the amount of the total hire purchase price (if the total of instalments already paid have not reached that amount). This is called the half-rule. You do not have to pay half the hire purchase price immediately.

If you have not paid half the hire purchase price you can still return the item. However, you will still owe the difference between the payments you have made and half the hire purchase price.

If you have already paid more than half of the total hire purchase price:

• You do not get a refund of the additional amount paid
• If you have missed any payments before ending the agreement, you still owe these arrears

You may have to pay damages for failure to take reasonable care. The finance company may issue a notice of costs, but you should try to get your own estimate before handing back the goods. Take photographs of the goods before handing them over. If you sign any paperwork, make sure it says ‘Statutory Termination’ and not ‘Voluntary Surrender’ because different calculations will usually be used to work out how much you owe.

The CCPC has more information about the half rule and cancelling a HP agreement.

Ending an agreement using the half rule may not always be the best solution. Contact MABS to talk through your options.

The finance company can only repossess (take back) the item under certain conditions:

• If you are in arrears and have not yet paid off one-third of the total hire purchase cost, the owner can repossess the goods at any time without taking legal action against you. They must send you a default notice first and give you at least 21 days to put things right, unless a court says they do not have to.
• If you have paid one-third or more off the total hire purchase cost, the owner cannot repossess the goods without taking legal action.

Any deposit that you pay at the start of the agreement or the value of any trade-in, for example, is taken into account in calculating one third of the cost.

If this one-third rule is breached by the owner, you are entitled to end the agreement and can ask for a refund of all payments made.

Your consumer rights are the same whether you buy something outright or through a hire purchase agreement. Anything you buy on hire purchase must be ‘in conformity’ with the contract, meaning it must meet certain conditions of quality, performance and durability.

You are entitled to certain remedies, when something you buy under hire purchase does not meet the conditions or standards. A remedy could be a repair, replacement, refund or a price reduction.

A guarantee under a hire purchase agreement applies in the same way as if items were bought outright. The manufacturer makes the guarantee.

Under a hire purchase agreement, you must take reasonable care of the hired item. If you damage the item and return it to the owner or finance company, they may charge you for the repairs.

For independent information or help in understanding any of the terms and conditions of your hire purchase (or any other loan) contract, you can contact the CCPC.

For free and confidential advice about HP debt, contact MABS.

If you want to make a complaint about a HP agreement, you should make your complaint to the finance company. If you are not satisfied with their response, you can make a formal complaint to the Financial Services and Pensions Ombudsman (FSPO). The FSPO can award you compensation where your rights have been breached, or where there is evidence of unfair treatment.

You do not have to accept the solution recommended by the Ombudsman. You can look for redress by taking legal action against the finance company.