INSTALLMENT PURCHASE

C Cash price Instalment Price

+ DP Down payment
B Balance C+I DP+TPP
- I Interest
Total Periodic Payment
TPP

C INTEREST based on
original balance r= %
+ DP

- I
B
I=Brt

INTEREST based on
reducing balance
! m = how many times per year

monthly/quarterly/semi annually

n = how many times through the years

2mI
r= t = time (year)
TPP B(n+ 1)
R = monthly payment

RULE 78  IF SETTLE LOAN EARLY

We will get rebate if we settle loan earlier

!
Example: if loan has been paid for 10 months,
than we supposed to pay.
How much should we pay to settle the loan?
k (k +1)
Rebate=I [ ]
n (n+1)
0 10 60 OPB=Rk−Rebate

k (k +1)
OPB=Rk−I [ ]
k=50 n (n+1)

n=60
Example 1

Mira wishes to purchase a set of furniture that costs RM10,000 and she has two options to consider.

Option 1 Option 2
Down payment RM2,000 RM2,000
Interest rate 8% on flat rate 8% on reducing balance
Mode of payment Monthly Monthly
Period of payment 20 months 20 months

For each option, calculate

i) The interest charged

ii) The monthly payment

Based on the information above, which option should Mira select? Why?

Answers!

Option 1 Option 2
C 10000.00 10000.00
-DP 2000.00 2000.00
B 8000.00 8000.00
+I 1066.67 560.00
TPP 9066.67 8560.00

i) Interest using Flat rate: Interest using Reducing Balance:

I =Brt 2mI
r=
B(n+ 1)
20
I =8000 x 0.08 x
12 2 x 12 x I
I =RM 1,066.67 0.08=
8000(20+1)
I =RM 560

ii) Monthly payment using Flat Monthly payment using Reducing Balance:
rate: TPP
R=
TPP n
R=
n
8560
R=
9066.67 20
R=
20 R=RM 428
R=RM 453.33

Mira should select option 2 because the interest is lower than option 1.