Hire Purchase

With tough competition from the high street banks, many dealers and manufacturers are hitting back with attractive hire purchase (HP) offers. In this type of deal, you have to pay a deposit (normally at least 10% of the car's price), and then pay off the balance (with interest) in monthly instalments over an agreed period of time. There's usually an administration fee to pay with the first payment and an 'option to purchase' fee with the final one.

The advantage of this type of finance is that it is usually very simple and easy to arrange. The drawbacks however, are:

• Until the car is fully paid for, it doesn't belong to you, so if you default on the loan, your car may be repossessed. (However, there may be some exceptions to this, which you can find out more about in the Debt Resource Centre).
• As you do not own the car until the end of the contract, you may not modify it without the lender's permission.
• You may not sell your car to a third party until you have fully paid off your loan.

The APR for this type of loan usually ranges from about 8 to 13%; however interest rates vary between dealers, so check out the APR to tell you the real cost of borrowing. The monthly payments may be higher than with some other finance methods, but the overall sum paid back may be lower. However, if you have a good credit record, you may find that a competitively priced personal loan is cheaper.