When an individual decides to buy a car, they can find a range of financing options that will help them achieve the dream of owning a car. But before settling on an option, one needs to understand the different types of financing available for the purchase of a car. There are mainly two types of financing facilities available for vehicle purchases. From their names to the working mechanism, there are many differences between the two facilities. Let’s take a look at some of the major differences between a hire purchase and a car loan.
The Mode of Financing
First of the major differences between a hire purchase and a car loan is the mode of financing one receives with both the facilities. With a car loan, an individual obtains funds for car purchase. These funds are some percentage of the original selling price of the car. The individual then pays the loan amount back to the bank or the financial institution in form of monthly instalments at a fixed interest rate.
But with a hire purchase facility, the bank or the financial institution directly contacts the seller and buys the car for an individual. The individual then makes the repayment to the bank for the financing in the form of monthly instalments.
One of the major differences between a car loan and a hire purchase is the transfer of ownership. With a car loan, the individual gains the ownership of the car at the time of purchase. But the same is not the case with a hire purchase.
The ownership of the vehicles gets transferred to the individual once he/she pays the entire financing amount back to the bank or the financial institution. The ownership of the car for the time of facility stays with the bank or the financial institution providing the hire purchase.
Down Payment & Interest Rates
The down payment associated with a car loan is higher than that of a hire purchase. In most of the cases, there is no or low down payment associated with a hire purchase. Individuals who choose to buy a car can also see a notable difference between the interest rates associated with these two facilities.
The interest rates at which funds are obtainable via a car loan are generally higher than the interest rates associated with hire purchase financing.
During the financing tenure of a hire purchase facility, an individual can choose to terminate the agreement and return the car to the bank or the financial institution.
But a car loan doesn’t come with such a feature. Once an individual takes a loan for a car purchase, he/she needs to make the full payment for the loan amount and cannot discontinue the facility or terminate the agreement until the loan amount has been fully repaid.
Right to Sell or Transfer
When an individual opts to get a car loan for a car purchase, the ownership will be in his/her name from the time of purchase. Thus, he/she being the rightful owner of the car can sell or transfer the car to a third party.
But an individual can’t perform the same action on the car with a hire purchase as the car’s ownership stays with the bank or the financial institution till the full repayment for the financing is made.
Maintenance & Repairing Charges
Another major difference between a car loan and a hire purchase is the bearing of maintenance cost and repairing charges. Since the ownership is in the name of the bank, all the maintenance costs and repairing charges are borne by the bank with hire purchase.
But with a car loan, the individual needs to bear all kinds of charges related to maintenance and repairing of the car.
Insurance or Takaful Coverage
It is mandatory to get a motor insurance coverage or takaful coverage with a hire purchase as per the Hire Purchase Act 1967. But a car loan doesn’t come with a compulsory insurance or takaful coverage.
The above discussion about the differences between a car loan and a hire purchase concludes that a car loan is suitable for individuals who need a car on a long-term basis, whereas the hire purchase is suitable for the ones who need the car for a short-term.