How to calculate hire purchase payments

In the United Kingdom and other countries, buying products via an instalment plan is known as a hire purchase. Typically, a down payment of ¼ to ½ the total cost of the product is required at the time of purchase, with weekly or monthly payments are required after that. These arrangements don't come cheap: interest rates of 19 per cent to 22 per cent or more are common. Therefore, it's wise to calculate hire purchase payments beforehand to ensure you can afford them.

Calculate the total cost of the item you wish to purchase by including the sales tax or VAT (value added tax) and any other charges or fees that may apply. These may include accounting, insurance, and transport charges, among others.

Subtract the amount of your down payment from the total cost. Your payments are based on the total cost minus the down payment.

Ask what the interest rate is and how it is calculated. Some interest rates are offered at a flat rate while others are compounded periodically on the balance remaining.

Find out if your store offers an interest-free period during your hire purchase agreement. Some arrangements include a six month interest-free period, whereby if you pay off the item within that time frame, no interest is added.

Calculate hire purchase payments based on the amount you owe, the interest rate, and payment schedule. This could amount to an equal payment throughout the course of your payments, or it could mean varying amounts.

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About the Author

Erin Moseley is an advocate for science education. Since 1985, she has written numerous technical, user and training manuals for major corporations, public agencies and universities. She holds a Bachelor of Science in geology.

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