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Hire purchase and conditional sale debts. How to deal with arrears

Hire purchase (HP) is a type of finance agreement used to buy motor vehicles and household goods such as furniture or appliances.

HP differs from other types of finance because you don’t own the goods until the last payment has been made. If you miss payments, the HP creditor can take the goods back.

As soon as the last payment is made, the goods become yours.

HP is also known as conditional sale, and your agreement may use either term.

Hire purchase arrears

If you miss payments to a HP agreement, your creditor will contact you. They may let you repay the arrears over time, or extend the agreement.

If you don’t pay back the arrears, your creditor will usually issue a default notice after around three months. After they’ve issued the default notice they can take action to repossess the goods.

If you’re struggling to pay back HP arrears and you want to keep the goods, contact our debt helpline (freephone, including mobiles). We can help you work out what you can afford and discuss your options to see if you can keep the HP goods.

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Repossessing hire purchase goods

If your HP agreement has defaulted, your creditor can take action to get the goods back. How they do this depends on how much you’ve paid and where the goods are kept.

You creditor can repossess the goods without a court order if:

  • You’ve paid less than a third of the amount owed under the HP agreement, and
  • The goods are not kept in your home or on private land

If you’ve paid more than a third of the agreement, or if the goods are stored on private land or inside your home, your creditor will need a court order before they can repossess them.

This means household items like furniture and electrical goods can’t usually be repossessed without a court order, but motor vehicles often can be.

If the goods are repossessed, your creditor will usually sell them at auction. If this doesn’t raise enough money to pay off the remaining debt, you will still owe them. They may take further court action to get the money back from you.

If your creditor starts court action, you’ll receive some court forms in the post. If this happens contact us for advice.

Ending a hire purchase agreement yourself

If you can’t afford to pay your HP and you don’t want to keep the goods, you can end the agreement yourself at any time as long as the creditor hasn’t issued a default notice. If you end the agreement, you won’t get back any of the payments you’ve already made.

To end the agreement, write to the creditor. Send the letter by recorded mail and keep a copy for yourself. You have to ask for this in writing, and if you ask by phone the creditor doesn’t have to agree.

The creditor will reply in writing, telling you how they want you to return the goods. They may come to collect the goods or ask you to take them to a local shop or dealership. They can’t ask you to travel a long distance to return the goods.

There may be something left to pay after you’ve returned the goods. The more you’ve already paid, the less there’ll be left to pay afterwards.

If there is a shortfall, you can treat this like any other non-priority debt, like a credit card or loan, and offer to pay it back in instalments at an amount you can afford.

The way a shortfall is worked out after goods are returned means you’ll almost always owe a smaller amount than if the account defaults and the creditor ends the agreement. This means if you know you won’t be able to afford the payments, it’s better to act soon and cancel the agreement before any arrears build up.

Some HP agreements are not regulated by the Consumer Credit Act, and you don’t have a right to end these agreements early. This mainly affects older high-value agreements or agreements taken out by a business.

What are hire purchase balloon payments?

Some HP vehicle agreements have a large ‘balloon’ payment at the end. The balloon payment means the regular monthly payments will be lower.

For example, £5,000 over 4 years is 48 monthly payments of £104.17. But the same amount with a balloon payment might be 47 payment of £85.17 and a final payment of £1,000.

The advantages of a balloon payment are:

  • If you’ve paid more than half of the amount owed under the agreement, you’ll usually have nothing more to pay it you end it yourself
  • If you’ve paid less than half of the agreement, there’ll be a ‘shortfall’ to pay after you’ve ended the agreement. This will be half of the amount payable under the agreement minus the payments you’ve already made. There may also be some extra charges if the goods are damaged.
  • The regular monthly payments are lower
  • If you don’t want to keep the vehicle, you can return it instead of paying the balloon payment and there’ll be nothing more to pay

But if you want to keep the vehicle, you’ll need to pay the balloon payment, so try to save up towards this before the agreement ends. If you can’t afford to pay it, your HP creditor may let you pay the balloon payment in instalments rather than trying to repossess the vehicle.

Can I sell goods on hire purchase?

Goods on HP don’t belong to you until you’ve made the last payment.

This means they’re not yours to sell so you’re breaking the law if you do this, and the creditor may take criminal action against you.

Vehicles on HP are all recorded on a database called the HP Index which anyone can check before they buy a vehicle. This means if you try to sell a vehicle on HP, no dealership will buy it from you.

Help with hire purchase debt

If you’re struggling to pay your HP agreement, please contact us. We’ll be able to advise you on the best way to deal with your debts. You can use our online Debt Remedy tool or call our Helpline.