What is the installment purchase? Advantages and disadvantages explained

  • Advantage: generally the cheapest form of financing to buy a car outright, HP debt is paid off faster than with a PCP, which reduces interest, flexible payment terms
  • Cons: high monthly payments, not designed for regular car trades, you don’t own the car until you make the final payment

An installment purchase (HP) financing agreement is calculated to divide the cost of the car, less any deposit, into a series of monthly installments. HP plans tend to require higher monthly payments than some alternatives, but most dealers will offer lease-to-own deals on new and used cars and trucks, which should help lower overall costs. One of the biggest advantages of HP financing is that you will own the vehicle at the end of the contract.

Available from all major car manufacturers and some second-hand dealers, these schemes are even available to buyers with low credit ratings, although it goes without saying that if you know you won’t be able to keep up with payments, you should Avoid taking out any financing.

The reason that purchase option financing is available to more people is because the loan is secured against the car, so it acts as collateral to cover the cost of late payments. Two advantages of an HP offer are that the monthly payments will be lower than an unsecured personal loan (or you can get a better quality car for the same outlay) and, unlike PCP finance, there is no final lump sum to pay at the end.

A deposit will be required to arrange the HP plan, and is usually around 10% of the list price of the car. However, as an incentive to get behind the wheel, a dealer deposit contribution will offer a reasonable discount on this cost, while models nearing the end of their useful life might not even require a deposit to help swap out existing stock. However, with this type of deal, you may only be able to purchase a car from existing inventory, rather than specifying a new model.

Securing the installment loan against the car helps keep monthly payments lower, but if you don’t make payments on time, the car could be repossessed.

As with unsecured loans, the installment purchase agreement can be set up to run on different monthly payment terms, but the main difference is that you won’t own the car until the final payment is made, rather than of owning the car as soon as you do. We have transferred your payment.

Interest rates are fixed for the duration of your HP contract, so you’ll know how much you’ll have to pay each month, and deals are often easy to arrange at a dealer or over the phone.

Click on the links below or at the top left of this page for complete guides on each of the key auto financing options…

How to pay for your new car

View installment purchase offers and get a personalized quote on any new or used car on our sister site BuyaCar.es

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