Written by Administrator | 29 June 2010

The agreement is usually a loan of fixed cost on a fixed period of time for the purpose of purchasing goods. This loan is secured against an asset, for instance a motor vehicle. The Hire Purchase agreement is either Regulated or Non-Regulated by the Consumer Credit Act (please see the module on Regulatory Knowledge for more details). It is suitable for motor vehicles. Under the rule of law, the title of the unit will remain with the finance company until it has been fully repaid by the customer including "Option the Purchase" fee although in effect, the asset is owned by the customer.

 

Hire Purchase Agreement Participants:

• The Finance Company – The customer agrees with the finance company to use the vehicle for a certain period, provided there is settlement of initial fees. When the payments are fully made, the customer has the option of car ownership by purchasing it by also paying the Option to Purchase fee.
• The Dealer – The dealer is the middle man with whom the customer makes the initial arrangement. He sends the draft of the sale to the finance company. Once accepted, the contract will be signed by the customer and the finance company will be invoiced by the dealer. In essence, the finance company pays for the purchase and allows the customer to use the it. The latter in turn, pays the company on an agreed term.
• Customer (Debtor) – The customer is a main participant in the agreement as he is the ultimate owner of the purchased unit once he has paid it in full subject to the agreed conditions.

In order to conclude a Hire Purchase Agreement, one of the following has to take place:

• Early Settlement – Once the customer is able to pay the full settlement and has decided to pay the loan in full even ahead of the agreed time, he may do so at any time. The customer also needs to pay to the lender the Option to Purchase fee. Depending on the lender, he may give the buyer a rebate on the unused interest. But the minimum amount of the rebate is dictated by law if the agreement is Regulated by Consumer Credit Act.
• End of Contract/ Agreement – When all the agreed payments are made at the end of the contract for Hire Purchase, the customer usually pays the Option to Purchase fee and then be the legal owner of the unit. But even when the car was fully paid, it can be returned if the buyer wants to. A fee will be set by the finance company, a minimum of £1 without any maximum limit.
• Charges / Fees – Usually, finance companies charge a starting fee, often known for different terms such as set up fee, administration fee, facility fee or documentation fee. And the final payment is the Option to Purchase fee which signals the official transfer of the goods to the buyer. With Hire Purchase Agreements, no mileage condition is in effect.

Prior to entering the Personal Contract Purchase, take note of the following:

1. A Hire Purchase Agreement is a contract between a debtor (customer) and a lender (Finance Company). At the end of the agreement or at any point before that, the debtor has the option to own the purchased goods.
2. The customer may pay a deposit plus interest. The remaining amount and other interests may be settled over a certain fixed period.
3. Other fees, such as facility fee or acceptance fee may be included in the contract.
4. Up until the customer settles the Option to Purchase fee, the title remains in the hands of the Finance Company.

PCP (Personal Contract Purchase) Agreements

In essence, a PCP is a purchase agreement secured against a car that is under the vehicle mileage and terms of agreement. Until the end of the contract a predicted minimum amount set by the finance company called GMFV (Guaranteed Minimum Future Value) is made as an offset. It gives the customer an idea of the least amount of the car's worth in the future. This value includes a balloon payment ensuring that the buyer will not be in a negative equity situation at the end of the contract, assuming that all the terms and conditions are met (e.g. the return of the vehicle in good condition and not in excess of the mileage conditions). It is a low risk, low-priced fund package that are designed to meet driving needs now and in the future. It is a very good alternative to conventional funding packages as long as the customer complies with the terms and conditions.

The parties involved in PCP is tri-partite, basically like the Hire Purchase Agreement.

• Finance Company – The finance company lends the vehicle to the buyer for the agreed period at the agreed payment terms. When the agreement expires, the customer has the option to own the unit by paying the GMFV (and if on a HP contract, the Option the Purchase fee).
• Dealer – Acts as the middle man and sends the proposal and mileage details to the finance company who computes the GMFV and monthly repayments. If everything is amenable, the buyer signs the contract and , upon payment, the dealer gives invoice to the finance company. As a result, the finance company purchases the vehicle and lets the customer it.
• Buyer / Customer – Basically the same with the HP Agreement but with PCP, the it is the customer who decides how long he can keep the car and the number of mileage.

Form and Use of PCP (Personal Contract Purchase)

Much like the HP Agreement, PCP is a fixed amount for a fixed time to acquire a vehicle, ideally a motor vehicle. The buyer is technically the owner of the unit, but under the law the title will not be passed on to him until the full settlement of the loan plus the GMFV (Guaranteed Minimum Future Value).

Conclusion of the Agreement

At any time, the PCP Agreement can be concluded if the customer pays the outstanding balance plus the GMFV. The lender may give a rebate on the remaining interests; but if the agreement is regulated by the Consumer Credit Act the law lays down the minimum amount of the rebate.

The buyer has the following options at the conclusion of the contract.

1. Using the equity deposit, part exchange for another vehicle. Or, the customer can part exchange with the vehicle dealer with for the next new vehicle. Or, if the exchange value is higher than the GMFV, it can be used as a deposit for the next financial agreement or can be received as cashback. The customer may also sell the vehicle in private and can earn profit above the GMFV.
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3. Customer pays the GMFV. Once the customer decides to own the car, he can settle the GMFV and the Option to Purchase fee as a part of the agreement. Sometimes, finance companies permit refinancing of the GMFV for easier payments on the part of the buyer.
4. Return the car and leave. If in the opinion of the customer, the car's worth is less than its GMFV, he can part with the car and return it to the finance company who absorbs the loss because the final value of the vehicle is guaranteed. If in case the car exceeded the mileage agreement, the customer pays the charge plus VAT applied to each mile exceeding the contracted sum. The lender may also charge the buyer for any wear and tear with the unit.

How is GMFV set?

GMFV is set by the manufacturer or finance company at the onset of the contract. Normally, it is calculated after considering the car's retail price, the time the customer keeps the vehicle and the mileage covered.

1. It is the customer who chooses the length of time of the agreement.
2. The finance company forecasts the mileage based on the customer's expected usage.
3. The GMFV is set by the finance company.

In conclusion a hire purchase agreement might suit some individuals whilst others may end up paying more than they had originially intended