Everything you need about buying a car via “hire purchase”

Hire Purchase is a method used in the United Kingdom and many other countries to help buy a car. Where a person can pay a small amount for a car and “rent it” throughout the years with the ability to buy it at the end of the contract.

This method can be used for both new cars and used cars, as it allows you to pay a deposit for the car and then pay off the car’s actual value through monthly installments, with the loan secured against the car. However, this means that you would not own the car until you pay off the last installment.

Hire Purchase 101:

1. You will typically need to pay a deposit that equals around 10% or more of the car’s value.
2. You will need to pay off the remaining of the car’s value via monthly installments over a period of 12 months to 62 months – one to five years.
3. This method is usually arranged with car dealers, but some brokers offer it as well.
4. The annual rates differ from new to used cars. Used cars rates are usually lower, where it can be between 4% – 8%.
5. The annual rates can actually be higher if you had a bad insurance score as well.
6. You can check your insurance score via the below site:
   • Money Saving Expert Credit Club
   • Credit Karma
   •  ClearScore

among other sites.

Before you sign off the deal:

Make sure you understand the terms and conditions thoroughly. For example: after finishing all of your installments, you will have to pay a final fee, on top of the installment, known as the “Option to Purchase”, and only after paying that fee you will legally own the car. The fee usually varies between 100£ and 200£, so keep it in mind to ask about this before you commit to the deal.

Advantages of “Hire Purchase”

• Flexible installment period, from 1 year to 5 years. This will help you to play the purchase based on your budget and how much you can pay monthly, however, keep in mind that the longer the period the higher the interest rate.
• the downpayment is arguably low, typically 10% of the car’s value.
• As the interest rate is fixed, you would have the ability to calculate your budget and how much exactly you are paying each month.
• After paying around 50% of the car’s value, you would have the option to return it and not pay any more installments.
• This method can be more useful to those with bad insurance scores than an unsecured loan, as the car can be considered as collateral for the loan.
• The hire Purchase method does not have any milage limitations or restrictions.

Disadvantages of “Hire Purchase”

• You will not be the owner of the car until you have paid the last installment. This means, if you have run into any financial issues, the company/deal can take away the car
• Since again you are not the owner of the car, you will not be able to sell off the car unless you have permission from the company/dealer.
• The lower your deposit, the longer your installment period would be, the higher the monthly interest rate.
• Until you have paid 30% of the car’s value, the lender can take away the car without a court order.

Islam views on “Hire Purchase”

Hire purchase is Halal and is Islamic banks usually offer it. The International Fiqh Academy stated the permission for it in Order No. 44 (6/5) and it was audited by Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI). Where the permission comes from agreeing on the fixed “renting” price beforehand, and the tenant, in this case, is not responsible for the lender including the interest price in the monthly payment.

There is no clear issue on buying the rented object, the car in this case, at the end of the renting contract for a price that was also agreed on beforehand.