How are interest rate and hire purchase instalment calculated on a fixed rate hire purchase (HP) financing?

FIXED RATE FINANCING: Calculation of term charge and HP instalment

Term charge on a fixed rate HP financing is calculated on the initial amount financed. See example:
Amount financed RM50,000
Term charges (Interest rate) 10% per annum
Tenure (Repayment period) 5 years (60 months)
Interest charged (Amount financed) x (Rate) x (Years)
= RM50,000 x 10% x 5
= RM25,000
Annual percentage rate = 17.3%

The monthly instalment is calculated as follows:

Monthly Instalment

= Amount financed + Total interest on amount financed
                Repayment period (months)

= RM50,000 + RM25,000

= RM75,000

= RM1,250

Since term charges are calculated on the initial amount financed, you will get a rebate on the term charges if you repay in full the balance due under the hire purchase (HP) agreement.

Using the earlier example, where your HP tenure is 5 years (60 months) and you would like to pay off your loan after paying 48 monthly instalments, you will get a rebate on the term charges for the remaining 12 months (i.e. 60 months - 48 months = 12 months). The calculation of rebate is as follows:

Total term charges on the amount financed is RM25,000.

Calculation of rebate on interest:

Rebate on interest

= RM25,000x(1+2+3+...n)

n = remaining repayment period (in months)
        i.e. 12 months k = original repayment period (in months)
        i.e. 60 months

Rebate on interest

= RM25,000 x (1+2+3+...+12)

= RM25,000 x 78

= RM1,066

Back to Hire Purchase (HP)'s Contents

Reprinted with permission from BankingInfo (A Consumer Education Programme by Bank Negara Malaysia)

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Knowledge Base ID :   1305
Last Reviewed :   May 22, 2014
Source :   BankingInfo
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