Hire purchase and conditional sale agreements

How hire purchase works

Under a hire purchase agreement, the finance company buys the goods from the supplier and hires them to the customer. The customer makes regular payments (usually monthly) and has an option to purchase the goods at the end of the agreement, typically by paying a small "option to purchase" fee.

Title retention is the defining feature of HP. The finance company owns the goods throughout the agreement. The customer has possession and use, but not ownership. This has important consequences:

• The customer cannot sell the goods during the agreement (because they do not own them)
• If the customer defaults, the finance company can potentially recover its own property
• However, statutory protections significantly restrict the finance company's right to repossess (see the one-third rule below)

Hire purchase vs personal loan

With a personal loan, the customer borrows money and buys the goods outright. The lender has no claim on the goods themselves. With HP, the finance company retains ownership. This makes HP more attractive to lenders because the goods serve as inherent security, but it also means HP agreements attract additional consumer protections that do not apply to unsecured lending.

The one-third rule: protected goods

Section 90 of the Consumer Credit Act 1974 creates one of the most significant protections for consumers under HP agreements. Once the customer has paid one-third of the total amount payable, the goods become "protected goods". The finance company cannot then repossess them without a court order.

What this means in practice:

• If the customer has paid one-third or more and falls into arrears, you cannot simply turn up and take the goods back
• You must obtain a court order (a "return order" or "transfer order") before recovering the goods
• If you repossess protected goods without a court order, the agreement is automatically terminated, the customer is released from all liability, and the customer can recover all sums already paid

Calculating one-third: The total amount payable includes the deposit, all instalments, the option to purchase fee, and any other charges under the agreement. It does not include default charges or interest on arrears.

What if the customer voluntarily returns the goods? Section 90 only restricts the creditor's right to repossess. If the customer voluntarily hands back the goods, this is a voluntary termination (see below), not a repossession, and the one-third rule does not apply in the same way.

Voluntary termination: the half rule

Sections 99 and 100 of the Consumer Credit Act 1974 give the customer an unconditional right to voluntarily terminate an HP or CS agreement at any time. This is sometimes called the "half rule" because of how the customer's liability is calculated.

How it works:

• The customer can end the agreement by giving written notice and returning the goods
• The customer's maximum liability is half the total amount payable, minus what they have already paid
• If the customer has already paid more than half, they owe nothing further (but cannot claim a refund of the excess)
• The customer must take reasonable care of the goods; if they have failed to do so, the finance company can claim for any resulting diminution in value on top of the half-rule amount

Example: A customer has an HP agreement with a total amount payable of GBP 20,000. They have paid GBP 8,000 and want to terminate. Half the total amount payable is GBP 10,000. The customer would need to pay an additional GBP 2,000 (GBP 10,000 minus GBP 8,000) and return the vehicle. If they had already paid GBP 12,000, they owe nothing further but cannot reclaim the GBP 2,000 overpayment.

This right cannot be excluded. Any term in the agreement that purports to remove or restrict the customer's right to voluntarily terminate is void.

Conditional sale vs hire purchase

A conditional sale agreement is similar to HP but with one key difference: there is no separate "option to purchase". Ownership passes automatically to the customer when they have made all the required payments (or met another specified condition).

For practical purposes, the consumer protections are identical. The distinction matters mainly for the legal mechanism by which ownership transfers.

Motor finance: the most common HP use case

Motor finance accounts for the vast majority of HP and CS agreements in the UK. Around 80% of new cars and a growing proportion of used cars are financed through some form of credit, with HP and Personal Contract Purchase (PCP, a form of conditional sale) being the most common products.

FCA motor finance review

The FCA has been conducting a review of motor finance practices, with a particular focus on discretionary commission arrangements (DCAs) where dealers could set the customer's interest rate and earn more commission by setting a higher rate. The FCA banned DCAs in January 2021.

In October 2024, the Court of Appeal ruled in Johnson v FirstRand Bank that motor dealers owe fiduciary duties to customers when arranging finance, and that commission arrangements must be fully disclosed and consented to. The Supreme Court is considering the case. This has significant implications for how motor finance commission is structured and disclosed going forward.

If you are a motor dealer offering HP or PCP:

• Ensure you are not using banned discretionary commission models
• Disclose all commission arrangements clearly and prominently
• Consider whether your commission model could be challenged under the Johnson ruling
• Monitor the Supreme Court's decision, expected in 2026
• Review your FCA permissions to ensure they cover all your finance activities

Pre-contract requirements

Before entering into an HP or CS agreement, you must provide the customer with:

• Standard European Consumer Credit Information (SECCI) form: This sets out the key terms including the APR, total amount payable, instalment amounts, and duration
• Adequate explanations: You must explain the key features and risks of the agreement so the customer can assess whether it is suitable for them
• Creditworthiness assessment: You must assess whether the customer can afford the repayments

The agreement itself must be in the prescribed form, signed by the customer, and a copy provided at the time of signing (or within 7 days if sent by post).

Early settlement

The customer has a statutory right to settle an HP or CS agreement early at any time. You must provide a settlement figure within 7 working days of a request. The settlement figure must include a rebate of interest calculated using the statutory formula. You may charge early settlement compensation of up to 1% of the amount repaid early (or 0.5% if the remaining term is less than 12 months), but only if the early settlement actually costs you more than GBP 8.