Is Hire Purchase Halal And How Does It Work?

Hire Purchase (HP) is a common way to finance a car purchase, allowing you to spread the cost over a set period instead of paying the full amount upfront. You pay more per month as compared to a PCP deal but there is no balloon payment at the end but is Hire Purchase halal?

Unfortunately there is usually interest involved, so not the best option for everyone, but here’s how it works:

Making the purchase:

1. Choose a car: You select the car you want to buy from a car
2. Apply for finance: You’ll need to apply for HP finance with a lender like a bank or car dealership. They’ll assess your creditworthiness and affordability to determine what you can borrow.
3. Pay a deposit: You’ll typically pay a deposit which can anything from zero to as much as you wish. A bigger the deposit reduces the amount you need to borrow and your monthly payments meaning you pay back less interest overall.
4. Sign the agreement: Once approved, you’ll sign a HP agreement outlining the total loan amount, interest rate, term (payment length), and monthly repayments.

Owning the car:

1. Monthly payments: You’ll make fixed monthly payments over the agreed term, typically 12 to 60 months. These payments cover the loan principal (borrowed amount) and interest charges.
2. Ownership transfer: Until the last payment is made, you don’t legally own the car. The lender holds the title, and the car serves as collateral.
3. Option to purchase fee: When you make the final payment, there’s usually a small “option to purchase fee” to officially transfer ownership to you. Usually about £10-£25.

Pros of HP:

• Spreads the cost: Makes expensive cars more affordable by breaking down the cost into manageable monthly payments.
• Predictable payments: Fixed monthly payments make budgeting easier.
• Pay it off early: You may pay the loan of in full at any time or make partial overpayments. There is usually no penalty for this and a good way to pay it off early with minimal interest charges.
• Ownership at the end: You own the car outright once all payments are made.
• No mileage restrictions: Unlike Personal Contract Purchase (PCP), you can drive as much as you like without penalty fees.

Cons of HP:

• Interest charges: You pay interest on the loan, making the total cost of the car higher than paying upfront.
• Depreciation Risk: If your car loses a lot of money the risk is yours as you have agreed to finance all of it. No hand-back option as you get with PCP.
• Financial risk: If you fail to make payments, the lender can repossess the car.

Things to consider when choosing HP:

• Interest rate: Compare interest rates from different lenders to find the best deal.
• Term length: Longer terms mean smaller monthly payments but higher total interest costs.
• Deposit amount: A larger deposit reduces the loan amount and monthly payments but requires more upfront cash.
• Your budget: Ensure you can comfortably afford the monthly repayments without straining your finances.

Remember, HP is a financial commitment, so careful research and comparing options is crucial before making a decision. It’s also recommended to seek financial advice if you’re unsure if HP is the right choice for you.