There may be occasions where you wish to make a purchase using finance, this will usually be for a high value item such as a car or furniture and you may arrange this directly with the finance company or the company selling the goods may do this on your behalf. Before deciding to enter a finance agreement you should decide what type of finance suits you best and then shop around to find the best deal with the lowest APR.
Below you’ll find information on how some of the most common financial agreements work:
Hire purchase (HP)
In a HP agreement you are essentially hiring the goods from the finance company over a period which will be specified within the contract. During this period the finance company own the goods so if you fall behind on your payments then you’re at risk of them taking it away. At the end of the contract period you have the option to pay a small fee to buy the goods (transfer ownership to yourself) or to hand them back. You also have the option to hand the goods back before you reach the end of the agreement, this is called voluntary termination. You must have paid half or more of the total finance and not be in arrears. If you have any issues with the goods on a HP agreement, then you would contact the finance company to get them resolved.
Personal contract purchase (PCP)
PCP agreements work in a similar way to HP where the finance company own the car and you can either hand the car back at the end or pay a fee (balloon payment) to buy the car. In a PCP agreement the finance doesn’t cover the full value of the car for example it may only be £10,000 for a car valued at £15,000, with the remaining £5,000 being the balloon payment at the end should you choose to pay this. If you have any issues with the car then your rights will be with the finance company.
Goods bought on a conditional sale agreement are owned by the finance company until ownership passes to you, however unlike HP and PCP agreements there is no option to hand the car back and no fee to transfer the ownership, it happens automatically once the final payment has been made. As before your rights will be with the finance company if you have any issues with the goods.
Fixed sum or loan-linked agreement
These types of agreements are different from those above in that you become the owner of the goods from the point of purchase so there is no balloon payment or option to hand the goods back. If you have any issues with the goods your rights will be against the trader that supplied them rather than the finance company. You can however also hold the finance company jointly liable for any issues which can be useful if you and the trader are unable to resolve the issue, this would be under section 75 of the Consumer Credit Act 1974.
You enter an agreement for a loan which you then use to pay for goods, with you becoming the owner of the goods at the point of purchase. As the finance company had no part in the purchase of the goods, they will have no liability for any issues that arise with them. Instead your rights will be against the trader that supplied the goods to you.