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I am very uneducated when it comes to personal finance. Four years ago I decided to buy a car. The dealer offered me the car with 0% interest and when I told him that I might pay the installments faster than one installment a month he told me that it's a very bad idea as I am paying 0% interest and I should take my time paying the full amount. I have a very good credit score and I could easily get a personal loan and pay for the car in full.

However after a year it came to my attention that I don't own the car and it's called hire purchase and it's simply like the company owns the car and I am only renting it every month but by the end of the agreement period the company will give me the car as a gift? This way they have control over the car and can retrieve it anytime I stop paying the installments.

My problem here is the case of an accident and the car gets written off! The insurance will pay market value of the car, the gap insurance will pay the difference between the market price and the original price we agreed on. All the money will go to the dealer, my insurance will take the written off car and I end up with nothing!

How is that fair?

  • @HartCO so you telling me I'll end up paying £15000 for 5 years and I still need to purchase the car? – Ulkoma Mar 15 '18 at 15:57
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    I was thinking it's like a lease in the US, and it is, but it sounds like typically the "purchase" price at the end is just ~£100-£200 which covers transfer paperwork. You'll have to check your agreement. – Hart CO Mar 15 '18 at 15:58
  • I never heard the term "hire purchase" but what you described is exactly how loans through dealerships are done. The creditor holds the title. You don't get the title until the loan is paid off. So technically, you don't truly own the car until it is paid off. Standard car loan. I don't know how the loans work if you go directly to the bank for a car loan but since most dealerships are simply the middle man for banks then I'd imagine they work the same way. – Dunk Mar 16 '18 at 20:24
  • @Dunk the biggest difference as I imagine it is that if I don't own the car I get nothing from the insurance if the car got written off and this means I have lost everything I paid. A personal loan to me is that I walk to the bank and get the money in cash, pay for the car and it becomes mine. If I ever screw things up with the bank my car is safe in spite of what the bank would to me legally. If the car gets written off the insurance will get me a replacement. The personal loan option is way more better to my humble understanding. – Ulkoma Mar 16 '18 at 22:24
  • Is the 0% really 0%? There may be fees, such as 10GBP per 1000GBP financed. Those fees are not technically interest but it is money you pay to get a loan for the car. No one is ever going to lend you money for nothing. – Freiheit Mar 23 '18 at 13:14
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If I am understanding the situation correctly, you actually came out ahead here. You owed more than the car was worth, but the gap coverage came through and erased your remaining debt.

You would be in the same boat even if you had taken the personal loan. In that case, when you crashed the car, your insurance company would still have only paid the market value of the car at the time of the crash. It sounds like you owed more than the car was worth, so the entire amount would have gone to the bank. The insurance company would still have taken the wrecked car, and you’d be left with nothing.

For your next car, you may want to consider something more affordable. Pick up a functional used car that you can pay cash for. You won’t have any loan to worry about, and you can immediately start saving up for your next, better car. In the event of a crash, you will owe nothing and can use any insurance claims towards the purchase of a replacement.

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    Also, taking financial advice from car salesmen is not usually recommended. – Ben Miller Mar 15 '18 at 16:47
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I've had several cars on hire purchase so hopefully I can help explain some of this to you.

  • The finance company owns the car until you have paid for it in full.

  • You pay x per month for y years. At the end of the y years, you won't have paid for the whole value of the car. There will be outstanding finance, often called your "final payment" or "balloon payment". At this point, you need to do one of the following:

    • pay off the remaining amount in one go

    • pay off the remaining amount bit by bit (by re-financing and taking on more monthly payments)

    • give the finance company the car back

At the end of the contract, the finance company either want the money or the car. Your insurance covers you for the value of your car but not for the value of your finance amount. Gap insurance makes up the difference (e.g. if you owe £10k but the crashed car is only worth £8k, your gap insurance will make up the £2k). This satisfies the car finance company because they get their money.

The way you benefit by having car insurance and gap insurance is that you don't end up in a situation where you owe the finance company money but don't have a car.

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My problem here is the case of an accident and the car gets written off! The insurance will pay market value of the car, the gap insurance will pay the difference between the market price and the original price we agreed on. All the money will go to the dealer, my insurance will take the written off car and I end up with nothing!

That's assuming the current value of the vehicle is less than the remaining amount owed, but if the current value is higher than the amount owed you'd get the difference. It would be the same scenario on a personal loan, the lender gets their balance, leftover to you. You'd have to look into your GAP policy, but my understanding is that they often cover the shortfall (if any) and the piece necessary to get you into another vehicle.

This is an issue because vehicles depreciate rapidly. Buying 2-3 year old vehicles gets you ahead of the depreciation curve a bit, but they still lose value and are ultimately just an expense.

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