Hire Purchase Agreement

Hire purchase is used when someone cannot afford to buy the item; a deposit is usually paid and the balance is paid over a fixed period of time.

How Does a Hire Purchase Work?

A customer is usually required to pay a deposit. From there, the interest is charged onto the balance that is owed and this is then divided into equal instalments which are paid over a fixed period of time.

We use the simple interest formula for this calculation.

Example 1

An electronics company offered a $1,200 television to the purchaser where a deposit of $100 was provided upfront with the balance to be paid over 18 equal monthly instalments. Interest is charged at 12.4% p.a. flat rate.

a) What is the total interest paid?

We need to calculate the balance of the loan first. Write down the information applicable to this calculation.

Price = 1,200
Deposit = 100

Use this information to calculate the balance of the loan.

Balance = cash price - deposit
Balance =1,200 - 100
Balance =1,100

Now write the balance (P) and additional information we were provided with- making sure that the rate and time are in the same units.

r=12.4 p.a.
T=1.5 years

Use the simple interest formula to calculate the amount of interest.

I=\dfrac {PrT}{100}
I=\dfrac {1,100\times 12.4\times 1.5}{100}

Total interest paid will be $204.60.

b) Calculate the repayment value.

First, find the total repayment amount (not including the deposit).

Total repayment = interest + principal
Total repayment = 204.60+1,100
Total repayment = 1,304.60

To calculate the repayment amount, take the total amount and divide it by the number of repayments.

Repayment = \dfrac {1,304.60}{18}
Repayment = $72.477$

The regular monthly instalments are $72.48.

c) What is the total cost of the television?

To find this amount, add the marked price with the interest amount.

Total cost = 1,200+204.60
Total cost = 1,404.60

The total cost of the television is $1,404.60.


  • The purchaser can use the goods while they are being paid off
  • The cost of the items are spread over a long term with small amounts being paid


  • The cost of the goods is higher in the long run
  • The purchaser does not legally own the items, the finance company does (until paid off)
  • The finance company can repossess the goods and retain all previous payments should the purchaser forfeit making the payments

See also

Simple Interest
Effective Interest Rate