Hire Purchase

Hire Purchase: A payment method whereby a downpayment/deposit is paid and the outstanding balance (also known as hire purchase loan) with interest is paid in equal instalment over a fixed period of time.

Cash Price: The price of a product when paid outright.

Hire Purchase Price: The price of a product under hire purchase scheme.

$$\begin{align}
Hire\;Purchase\;Price & = \overbrace {Downpayment/Deposit + Outstanding\;Balance}^{Cash\;Price} + Total\;Interest \\
& = Downpayment/Deposit + \underbrace {Outstanding\;Balance + Total\;Interest}_{Total\;Instalment\;Amount} \\
\end{align}$$

Note: \(Total\;Instalment\;Amount = Total\;Amount\;obtained\;using\;Simple/Compound\;Interest\)

\[Monthly\;Instalment = \frac{Total\;Instalment\;Amount}{Total\;No.\;of\;Months}\]

Note: During the instalment period, the retailer/financial institute is still the lawful and rightful owner of the product. Only when the hirer (i.e. buyer) has paid the full hire purchase price, does ownership transfer from the retailer/financial institute (i.e. owner) to the hirer. In the event that the hirer defaults on payment (e.g. failure to make payment, late payment, etc...), the retailer/financial institute may repossess the product.

Early Repayment/Redemption: If the outstanding loan is repaid before the loan period ends, the hirer will receive a rebate (i.e. reduction) on the interest. This rebate is a refund of the interest previously computed upfront and added on to the loan, but has not been incurred because the outstanding loan is repaid earlier than the agreed loan period. This interest rebate is calculated using the Rule of 78 formula.

\[Interest\;Rebate = \frac{{n\left( {n + 1} \right)}}{{N\left( {N + 1} \right)}} \times Initial\;Total\;Interest\]

where \(n\): no. of unpaid years/months & \(N\): original agreed instalment period (years/months).




Hire Purchase Guide (Cars)