What is Hire Purchase (HP) motorcycle finance

How does HP motorcycle finance work?

When you buy a motorcycle or scooter on HP, you’ll usually pay a deposit against the asking price and then the Hire Purchase loan will be for the remaining amount and this is what you’ll pay off in monthly installments.

You’ll agree a set term with the dealer, anywhere between 12 and 48 months (1 and 4 years) is common – although over longer term offerings are available. Once you’ve reached the end of your payment term, the vehicle will belong to you.

A working example

Let’s say you find a motorcycle with a cash price of £10,000 that you want to buy. You make a £2,000 deposit, meaning that you’re borrowing the remaining £8,000 to purchase the bike. If you paid this £8,000 off over 48 months, the payments would be £166.66 per month. After your 48th payment (installment), you’ll have finished paying off the bike and it’ll belong to you, the finance company will complete the required paperwork and the bike is yours to do what you like with.

Of course what’s missing from our calculation above is the APR, which is the Annual Percentage Rate, also known as the interest. The great thing about Hire Purchase is that the APR will be fixed at the start of the agreement, so whatever happens in the world’s financial markets,  your repayments will remaining the same, meaning you can confidently plan your outgoings each month.

Often the larger your deposit, the better the terms of the agreement, i.e the lower the APR will be and therefore the less your Total Amount Payable (TAP) will be. Similarly, the shorter your agreement, i.e 12 months instead of 60 months, the better the APR rate will be, as the finance company will get their money back faster and therefore they’re taking less risk.

Typically an APR will be around 7%, meaning that your £10,000 motorcycle, which you borrowed £8,000 to buy, will end up costing you £11,000 over 36 months.

Who owns the motorcycle during the Hire Purchase agreement?

When you buy a motorcycle with a Hire Purchase agreement, as soon as the ink has dried on the contract, the dealer invoices the finance company for the vehicle. The finance company have now bought the bike from the dealership – it belongs to them but they authorise you as the bike’s keeper. You then repay the finance company over the term of the agreement and once the term has finished the bike gets signed over to you – it’s yours to do what you want with it.

You’ll be listed on the V5C but you won’t be able to transfer (sell) the motorcycle to anyone else until the payment is settled. You’ll be required to have Fully Comprehensive insurance on the motorcycle, it’s likely the finance company will stipulate you stick to an agreed mileage limit and it’s usually the case that all the paperwork will be in your name, i.e. you can;t take out finance for a motorcycle and register the V5C logbook in someone else’s name.

How does Hire Purchase (HP) differ to Personal Contract Purchase (PCP)?

HP is simpler than PCP, you’re essentially taking out a loan and repaying it in full. When you finished paying off that loan, the vehicle becomes yours.

With a PCP agreement, the monthly payments are lower as you’re paying off a smaller loan. Your monthly payments are covering the capital depreciation of the vehicle and interest on the entire amount.

Your PCP loan will be the cash price of the vehicle, less any deposit you make and less the (Guaranteed Final Value), i.e the depreciation. At the end of the PCP term, you’ll have been making payments (often with a higher interest rate) on a smaller proportion of the bike but you won’t own it. You’ll give the bike back to the dealer or if you want to own the bike, you’ll have to pay a final balloon payment of the GFV amount.

Let’s say a cash price for a bike is £10,000, you make a £1,000 deposit and the GFV of the bike after 24 months is £6,000. This means your monthly payments are calcuated on your covering the remaining £3,000 of depreciation (£10,000 minus £1000 deposit, minus the £6,000 GFV). You pay down the £3,000 capital and you pay interest-only on the entire loan (in this case, £9,000) but the monthly payments will still be lower than HP as you’re borrowing a far lower amount of money.

HP payments are usually higher than PCP but at the end of an HP agreement you’ll actually own the asset and will be able to carry on using it, sell it to raise cash or use it as a deposit against another motorcycle.

What if I want to change my motorcycle before the end of the contract?

You can settle your HP early, this is called a settlement fee and the amount depends on where you are into your contract. What is common is that the dealer who sold you your motorcycle will call you up when there’s around a third of your agreement left and will offer you a new motorcycle – luring you in by saying that they’ll take care of the paperwork and any settlement fee.

Let’s say your motorcycle is a couple of years old and worth £10,000 but your settlement fee is £4,000. The dealer may offer to take your motorcycle in part-exchange, pay your settlement fee and ‘give’ you  £6,000 towards your new motorcycle. This sounds great as you will shortly have a new motorcycle but be cautious as the dealer will be in the driving seat. They might be angling to get you on a more expensive motorcycle with higher payments (which your large deposit will go some way to masking), they might be switching you onto a finance deal with a higher APR and in most cases, your new motorcycle will depreciate quicker than your existing one.

Do I have to use the dealer’s finance package?

Definitely not. Dealer’s rely on us being lazy and somewhat impulsive, so they’ll have pre-printed finance examples hanging from each motorcycle’s handlebars to tempt you. Remember HP is just a loan secured on the vehicle. You can shop around for a better loan, either in the form of a secured (HP) loan or an unsecured loan, i.e. a straight-up bank loan. The benefit of an unsecured (bank) loan is that you buy the bike with the loaned money and it belongs to you immediately – you don’t have to pay off the loan in order to sell the bike.

However you can use the dealer’s finance offer to your advantage. Most dealers use the manufacturer-backed loan company and each dealer will have a finance target to hit, as well as a sales target. So if you would rather go through the dealer for the sake of convenience, you should keep in mind they may be flexible on payment terms, as they’ll want to increase the total amount of loans they have issued in order to get their sales bonus.

As ever, always carefully study the terms and conditions of any loan and ensure you can meet the monthly commitments.