Hire purchase vs car loan in NZ

Most people searching this are standing in a dealership with two quotes, one called hire purchase and one called a car loan, and no clear idea what the difference is. This page explains it in plain terms, so you can compare the two on the things that change what you pay and what you risk.

Car Finance Guide is a guide, not a lender or a dealer. Nothing here is a quote, and the rates in the example are made up for illustration.

The short answer

Hire purchase is a way of buying a car in instalments where the finance company keeps ownership until you have paid everything. A car loan is money you borrow to buy the car, where you own the car straight away and the lender takes security over it.

For day-to-day use they feel almost the same. You drive the car, you make the same payment each week, fortnight or month, and you insure it. The differences show up in four places: who owns the car, what it costs, how easy it is to get out early, and what happens if life goes wrong.

What each one is

Hire purchase. Consumer Protection describes it as a way to take an item home straight away and pay in instalments, usually with interest and sometimes a set-up fee. It is also called a credit sale. It is a consumer credit contract, so the Credit Contracts and Consumer Finance Act applies to it in the same way as it applies to a loan. A car loan. You borrow a set amount from a bank, credit union or finance company, then pay the seller yourself. The loan may be secured against the car, which usually means a lower rate, or unsecured, which means a personal loan used to buy a car. Secured or not, the repayments work the same way.

Some products are marketed as a car loan but are written up as hire purchase, and the other way round. Do not rely on the name. Ask which one it is, and read the contract.

Side by side

• Ownership. Hire purchase: the finance company usually owns the car until the last payment. Car loan: you own it from the start, with the lender’s security interest registered against it.
• Who you deal with. Hire purchase: usually the seller, then a finance company the seller works with. Car loan: you deal with the lender directly and can shop at any seller.
• Buying privately. Hire purchase: mostly a dealer product. Car loan: works for private sales too, because you are a cash buyer to the seller.
• Cost. Hire purchase often sits higher on rate, and may carry set-up and account fees. A secured loan from a bank or credit union is often the cheaper end, if you qualify.
• If you stop paying. Both: the lender can repossess, subject to the rules in the Act.
• Early repayment. Both: lenders must accept full repayment, and may charge a reasonable fee. The fee depends on the product.

Ownership and repossession

This is the point that gets the most attention, but it matters less than people think. Under hire purchase the contract usually says the car is the finance company’s until you make the final payment. Under a secured loan the car is yours, but the lender holds a security interest, so it can take the car if you default.

Consumer Protection says that until you pay off the item, a hire purchase lender is usually entitled to repossess it if you miss payments. It adds that damaging, losing or selling the item does not end what you owe. So in practice both routes put the car at risk if you fall behind.

Where ownership does change things is when you want to sell or trade the car. Under either route you need the lender to release its interest, which means paying out the balance. A car with finance still on it cannot be cleanly sold, and this is also why checking a used car on the PPSR before you buy it matters. The register is free to search.

Rates and fees

Sorted’s hire purchase guide says hire purchase and credit sale deals usually charge about 17% to 27% interest, against about 12% to 20% for personal loans, and that establishment and account fees of $100 or more are common. That guide is about consumer goods in general rather than cars, so treat it as a rough marker and not a quote.

What decides your rate, either way, is the lender’s view of your situation: your credit file, income, deposit, the age of the car and the term. A bank offering a secured loan to someone with a clean file and a deposit will often price below a finance company covering a thinner file. The label on the contract does not set the rate. Your profile and the lender do.

Two things to ask for, in writing, on every offer:

1. The annual interest rate and every fee, including any monthly account fee.
2. The total amount you will repay over the whole term.

The second number is the one to compare. Our page on the comparison rate explains why a headline rate alone can mislead.

Credit criteria and who each suits

Lenders decide case by case, and nobody can promise you a result on either product.

A car loan tends to suit you if you have a reasonable credit file, steady income, and some time to shop. You can ask your bank or credit union for a figure before you visit a dealer, which gives you something to measure the dealer’s offer against. It is also the route if you are buying privately. See bank loan vs dealer finance for that comparison.

Hire purchase tends to suit you if you are buying from a dealer and the dealer’s finance company is willing to lend against that particular car, including in situations where a bank has said no. The cost of that convenience can be a higher rate, so it is worth comparing it with one other quote.

If your credit file is rough, say so up front. The right fit usually depends on the file, and a lender who knows the story from the start can give a more useful answer. Our best car loan guide covers how the options line up.

Early repayment and changing your mind

Consumer Protection says lenders must accept a full early repayment, and may charge a reasonable fee that is tied to their closely related costs. They can refuse part-payments unless the contract allows them. Sorted warns that break fees exist and tells borrowers to find them in the disclosure statement before signing.

Check three things before you sign: whether extra repayments are allowed, whether there is any fee for settling early, and how interest is worked out if you do.

Consumer Protection also says you can cancel a hire purchase agreement within five working days after getting the disclosure statement, but you will still have to pay for what you bought. It is a narrow exit, not a trial period.

What the dealer earns

The Commerce Commission’s 2021 review of motor vehicle finance found that dealers often arrange finance on behalf of lenders while also earning commission on sales, and it told lenders to make sure sales goals do not come before their duties to the borrower.

That does not make dealer finance bad. It means the person arranging your finance has a stake in the sale. Add-ons such as mechanical breakdown insurance, GAP cover and loan protection can also be rolled into the amount you borrow, so you pay interest on them too. Ask for each add-on to be priced on its own, and remember you can decline cover that does not suit you.

A worked example

This is an illustration only. The rates are round numbers made up for the example and are not a quote from any lender.

You are buying a $15,000 car and paying it off over three years, monthly, with no deposit.

• Hire purchase at 18% a year. The repayment is about $542.29 a month. Over 36 months you repay $19,522, so the cost of borrowing is about $4,522.
• Secured car loan at 11% a year. The repayment is about $491.08 a month. You repay $17,679, so the cost of borrowing is about $2,679.

The gap is roughly $1,843 over three years, or about $51 a month. Add a $250 establishment fee to the loan and its cost rises to about $2,929, so the gap narrows to about $1,593. A fee moves the answer, which is why you compare totals and not just the rate.

Now flip it. If the 11% loan is not on offer to you, because of your credit file or the age of the car, the real choice might be hire purchase at 18% or a car loan at 16%. The same method applies. Put each offer’s total repayable side by side, then pick on cost and fit.

What to do next, step by step

1. Set a number you can afford for the repayment, after rent, food, power and your other debts. Leave a buffer.
2. Ask your bank or credit union what it would lend and at what rate, before you visit a dealer.
3. Ask the dealer for its finance offer in writing, including the type of contract, the rate, every fee and the total repayable.
4. Compare totals, not repayments. A longer term lowers the payment and raises the total.
5. Check the car on the PPSR, and make sure you are not buying someone else’s debt.
6. Read the disclosure statement before you sign. It must show the key terms, and Consumer Protection says a lender cannot enforce a contract that lacks proper disclosure until it is fixed.
7. If you want help comparing, the /check form can pass your details to a broker partner. You choose whether to use it. Our disclosure page explains how the site is funded, and our editorial policy explains how pages are written.

Checklist before you sign

• You know whether the contract is hire purchase, a secured loan or an unsecured loan.
• You have the annual interest rate, all fees and the total repayable in writing.
• You know whether early repayment is allowed and what it costs.
• You have priced each add-on separately and kept only the ones you need.
• You have checked the car on the PPSR.
• You can afford the payment with a buffer.
• You have compared at least two offers.

Red flags

• A dealer who will only talk about the weekly payment and will not show the total.
• Pressure to sign today because “the rate won’t last”.
• Insurance or warranties added without being priced or explained.
• A contract you are not allowed to take home and read.
• Fees that appear for the first time on the signing page.
• A lender that cannot say which dispute resolution scheme it belongs to. Consumer Protection says lenders must belong to an approved scheme.

If repayments are already a struggle, tell the lender early and ask about hardship options. MoneyTalks offers free, confidential help on 0800 345 123.

Sources

• Consumer Protection: hire purchase and buying on credit
• Consumer Protection: the Credit Contracts and Consumer Finance Act
• Consumer Protection: what lenders must do
• Sorted: hire purchase
• Sorted: car loans
• Commerce Commission: report on motor vehicle financing and add-on products (2021)