*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 =

Deposit =

Use this information to calculate the balance of the loan.

Balance cash price deposit

Balance

Balance

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

p.a.

years

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

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 =

Total repayment =

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

Repayment =

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 =

Total cost =

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

## Advantages

- 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

## Disadvantages

- 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

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