06 June 2013
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 60
= RM75,000 60
= 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) (1+2+3+...k)
where:
n = remaining repayment period (in months) i.e. 12 months k = original repayment period (in months) i.e. 60 months
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