Our Guide To Hire Purchase Debt And What You Should Do If You Are Struggling To Repay It

Love Debt Free guide to paying off hire purchase debt
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Hire purchase agreements allow you to pay for goods in instalments and is a popular way to finance expensive goods such as new vehicles and appliances.

However, it’s distinctly different from a typical credit agreement in terms of ownership.

With a credit plan, such as a store card, as soon as you enter into credit, you own the goods. Even if it takes years to pay back the debt, the goods you purchased are undoubtedly yours.

With hire purchase, things work differently. Even you can expect to have full use of your goods from the very start of the hire purchase contract; you won’t own them until you’ve finished paying the final instalment.

This means that if you fall into arrears at any point, the owner of the goods has the right to reclaim them and can refuse to return them to you.

Continue reading to get full details on what you should do if you are struggling to pay off the debt.

How Does It Work?

A company selling expensive goods, such as cars, may offer their products on hire purchase. Instead of paying for a car with cash upfront, a hire purchase loan allows you to spread the cost of the purchase by making monthly payments over several years.

As with most loans, interest is charged on your hire purchase debt. This is normally included in the monthly instalment.

Until you make the final payment to the hire purchase company, you don’t own the goods. This means you can’t sell the hire purchase goods before the end of the contracts, and if you stop making repayments, the company can repossess them and auction them to recover the cost of your debt.

Who Is It For?

Anyone over the age of 18 can apply to buy goods on hire purchase, including people with bad credit. With hire purchase, the lender retains ownership of the goods purchased with the loan, which they can use as security.

This offsets the risk that the borrower with bad credit won’t pay them back- because the lender can repossess the goods and recover their money if this happens.

For this reason, the interest rates on hire purchase deals tend to be slightly lower than borrowing with an unsecured loan, too.

What Happens If I Can’t Pay My Debts?

When you take out a hire purchase contract, you are entering into debt. Bear in mind that because you won’t have ownership of the goods until the end of your hire purchase agreement, the lender can use these goods as security on your loan- meaning they can be repossessed if you don’t keep up with repayments.

However, there are a few things that have to happen after the first missed payment before a lender can make a repossession:

  • If you miss a payment, the finance company which owns the goods will contact you. At this stage, you may be able to negotiate to extend your contract or to make a lump sum as you can afford it. Extending your contract will reduce your monthly payments, but also leaves you in debt for longer so you’ll end up paying more interest on the purchase.
  •  At this stage, if you decide you can’t afford to keep the goods you have the option to return them to the owner (more on this below). Unfortunately, they’ll get to keep all the payments you have made so far, but the issue won’t escalate into a legal process, and you can avoid the default being recorded on your credit file. If you don’t reach an agreement and arrears go unpaid over a longer period of time (usually 3-6 months) the lender will issue a default notice. This formally breaks off your contract and is recorded on your credit file.
  • After the default notice has been paid; the owner will make arrangements to repossess the goods. They may have to apply for a court order to do so in certain circumstances.
  • The recovered goods will be sold at auction in an attempt to recover the money owed. If not enough is raised at the auction, you will be required to pay up to the value of your loan and another court order could be issued against you if you refuse. If you are unable to afford this, you might consider speaking to a debt advice organisation or debt counsellor.

Can The Owner Repossess The Goods?

If you don’t keep up with payments, yes, you don’t have ownership of the goods until you have made the final repayment at the end of the contract. Until this point, the owner can repossess the goods if you fall into arrears.

If you have not yet paid one-third of the total you owe when you fall into arrears, the owner doesn’t need to file a court order to come and repossess the goods, provided they aren’t stored on private land.

For example, if you had paid £3000 towards a £14,000 car when you went into arrears, the owner could tow it from the street without needing to get permission to do so.

If the goods are stored on private property, or you have paid more than a third of your bill towards them, the owner must file a request with the courts to repossess them.

What About Bailiffs?

In short, no. Your hire purchase lender should deal with your debt themselves. If bailiffs come to your property in relation to a different debt, it is illegal for them to take any goods in your possession which are part of a hire purchase agreement, because they do not belong to you.

Can I Change My Mind And Break It Off?

If you get cold feet about your hire purchase deal, you’ll have an opportunity to break it off thanks to a clause in the Consumer Credit Act. The owner is allowed to keep the goods and any payments made up to when the agreement was broken.  

To set things in motion on your part, you’ll need to notify the hire purchase company in writing that you want to call things off, explaining that:

  • you no longer need the goods, OR
  • you want to cut costs, OR
  • you can’t afford the repayments, OR
  • you can find similar goods for less elsewhere

You must have already paid at least 50% of the total debt before you end the agreement, or be willing to top up what you have already paid to the 50% threshold. In addition to this, some owners may ask you to pay a small fee to return the goods to them.

Even though the cost of getting out the hire purchase agreement can be steep, it is almost certainly less than the cost of defaulting on an agreement.

On top of that, any arrears on your exit costs are far less likely to end up before a court than arrears on the hire purchase itself.   

Can I Sell Something I’ve Bought On Hire Purchase?

Selling assets to clear your debts is a sensible financial solution- but only if the assets belong to you. You won’t become the owner of your hire purchase goods until you’ve finished paying off the loan, so it is illegal to sell the goods before this point.

If your lender (or a diligent buyer) discovers that you have sold goods under hire purchase goods, you could be facing criminal charges.

Can I Repay Hire Purchase Debts Early?

Most hire purchase companies will allow you to repay your debts before the end of the loan term if you are in a position to do so, but every lender will have their own terms and conditions.

In most cases, the company will charge an early repayment fee equivalent to 1-2 months interest when you pay off the debt early, although a few companies may charge the full amount of interest on your loan when you pay off early.

How Can Love Debt Free Help?

Here at Love Debt Free, we have partnered with some of the UK’s leading Debt help companies.

They have already helped thousands of people reduce and manage their debts, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these debt help companies, click on the below and answer the questions.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting Love Debt Free.
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