Doing arithmetic that involves money: Hire Purchase

In this presentation, we will look at one of the popular means to purchase expensive property such as land or house. It is called hire purchase. We are going to learn how to do calculations pertaining to high purchase. It is part of finance mathematics and really important to understand this concept. If you are to enter into such agreement in the nearest future, you will not be cheated in any way because of the arithmetic involved. First of all, we need to understand what hire purchase is all about.

Understanding Hire Purchase

Hire purchase is a common way to procure expensive items by paying part of the fee, and spreading the remaining balance over a longer period of time with interest. The buyer retains use of the property under a hire purchase agreement, but does not fully own it until he completes his payment. In a situation where he fails to complete his payment, the seller is allowed by law to seize the property until payments are duly completed.

Under a hire purchase agreement, both the buyer and the seller agrees on the initial deposit amount. They also agree how how many installments to be paid, and the amount involved. What is also agreed on includes any penalties that apply should the buyer fail to pay for some periods, or make late payments. These are all figures worked out and clearly documented as part of the agreement terms.

Calculating hire purchase figures

There is no universal formula for calculating hire purchase amounts and figures. The calculations made are usually based around percentages of the total money to be paid, the installments and any late payments or payments defaults.

Now I will demonstrate how to do this calculations with examples.

Example 1: The prize of a television is $30,000. To do hire purchase for this television, a customer has to deposit 35% of the cost. The balance attracts an interest of 15% per annum. If the loan repayment period is 3 years, calculate the monthly payments for this television.

Solution:
Cost = 30,000
Initial deposit = 35%
Interest = 15%
Repayment period = 3 years.

First of all, we need to calculate the Initial deposit amount which is 35% of the cost:

Initial deposit = (35/100)x30000
= 0.35x30000
= $10,500

Next, we need to know the balance by subtracting the initial deposit from the cost

Balance: = 30000-10500 = 19,500
Next we need to calculate the interest (15%) per annum for 3 years on 19500.

Interest = (3x15x19500)/100
= 877500/100
= $8,775

Now we need to work out the total amount to be repaid

Total amount to be repaid = 19500 + 8775
= $28,275

Now the monthly payment= 28275/36 months = $785.41
The yearly repayment is 28275/3 years = $9,425

Example 2: A small house costs $50000. If the hire purchase requires 20% initial deposit and the balance is to be paid over 36 months equal installments, calculate:

(a) The amount of the deposit
(b) the balance to be paid.
(c) monthly installment amount.

Solution
Cost = 50000
initial deposit = 20%
Balance period = 36 months

(a)To calculate the amount of the deposit, we find 20% of 50,000
Initial deposit = (20/100)x50000
= 0.2x50000
= $10,000

(b)To calculate the balance, we subtract the deposit from the cost
Balance = 50000-10000
= $40,000

(b)To calculate the monthly installment amount, we divide the balance by the period
Installment amount = 40000/36
= $1,111.11

Conclusion

From the two examples above, I have demonstrated what hire purchase is and how you could do calculations of any of its components. Its easy to work out the balance, the interest and other things. Once you have a basic grasp of arithmetic, it will not be hard to run these calculations and arrive at the correct answers.

Related

• Inverse variation - two quantities whose value go up and down