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Hire purchase and ‘buy now, pay later’ – how do they work?

Posted 31 May 2016 by Emily Bancroft

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Considering buying something on hire purchase? Find out what you should consider.

It can be hard to afford big items like a car or a sofa – that’s why you might want to spread the cost of it over a longer period of time. One way of doing this is hire purchase (HP) – but if you don’t keep up with the repayments, it could end up quite expensive – and you could even see the items repossessed.

You could also take your purchase home now and pay for it later, known as ‘buy now, pay later’. This type of borrowing can also work out quite costly. If you’re thinking of buying something in this way, we’ll take you through how it works and what the risks are.

What is hire purchase?

With hire purchase, you only need to put down a relatively small deposit to get whatever you’re buying – whether it’s a Hire Purchase agreement for a car, furniture or anything else. You’ll then pay to hire it for a period of time and you’ll have the option of buying it when the contract is up. 

Hire Purchase is a type of secured lending. This means the debt is ‘secured’ against whatever you’re buying, like how a mortgage is secured against your property. 

If you can’t keep up with the repayments, the lender could take the item away – repossess it. This is because you don’t actually own the item until you’ve made the last payment at the end of the contract.

You could pay less each month with a different kind of Hire Purchase, known as balloon hire purchase (BHP). Although your monthly payments will be less, you’ll have a lump sum to pay at the end of the agreement.

Make sure you know whether you’re buying something on Hire Purchase or ballon hire purchase. If you’ve not budgeted for that extra larger payment, you might not be able to afford it.

Buy now, pay later

Buy now, pay later is another type of credit agreement and you may still end up paying more than the item is actually worth. But with this type of borrowing, you might not even have to pay an initial deposit. Some store cards offer buy now, pay later agreements.

You might have a set amount of time before you have to start making any payments. For instance, if it’s for a larger purchase like a bed or a TV, you could have 12 months without paying. During this time, you usually aren’t building up any interest – this only happens when you have to make repayments. However, you should check this – some stores will charge you interest from the day you order. 

Buy now, pay later can offer a fairly flexible form of borrowing, meaning you can make relatively small repayments every month. Keep in mind that the longer you’re repaying, the more you’ll pay back in interest though – it will work out more expensive over the long-term.

What are the risks?

As we’ve mentioned, you won’t own the items you’re buying through Hire Purchase until the end of the contract. This means you can’t sell the goods because you don’t own them.

It’s important you check the small print of any Hire Purchase credit agreements before you try to sell them – if it says you shouldn’t do this, the lender could still repossess it if you don’t keep up the repayments and you could be committing a criminal offence.

Buy now, pay later in particular can be quite an expensive way to borrow, with average APRs of 20-25%. Before you buy anything through one of these deals, you should be as sure as possible that you’ll be able to afford the repayments. If you can’t, the amount you owe could grow quickly and become unmanageable.

Managing the debt

 

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Make sure you consider the full costs and any charges before you enter into a hire purchase or buy now, pay later deal. Work out how much you’ll pay over the long-term and decide if it’s worth it, and if you’ll be able to cope with the monthly payments.

If you’ve just taken out a hire purchase or buy now, pay later agreement and you’ve changed your mind, you can cancel it. Under the Consumer Credit Act, you have a cooling-off period of 14 days to cancel any hire agreements. This can be helpful if you’ve signed up to an agreement spontaneously and later realised you probably can’t afford the repayments.

But if you’re already starting to struggle with hire purchase debts, the best thing to do is to speak to your lenders. Explain the situation and they might be able to work out a new repayment plan based on what you can afford.

You could also get in touch with one of our expert advisors using one of the options to the left. They can help by talking through your problems and looking at the different solutions available. Debt solutions can help you to manage your unsecured debts so they’re not for your hire purchase payments. However, they could make your other debts more manageable – which will in turn make your hire purchase debts more affordable.

Whatever you decide to do, don’t just ignore the situation – you’ll only start to work through your debt problems when you face them head on.

 

by Emily Bancroft

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.