installment

purchase
CHAPTER 09
 learning outcomes
By the end of this chapter, you should be able to:
● Explain the meaning of installment purchases

● Understand how the interest rate is charged on the original balance and

the reducing balance of credit

● Compute the interest rate charged on the original balance of credit

● Compute the interest rate charged on the reducing balance of credit

● Compute the outstanding balance and unearned interest of the lender

under the Rule of 78.

introduction
 introduction
● Retailers offers their consumer to delay the payment of items
purchased in a specific given period.
● A down payment is made by a series of equal payments
(weekly or monthly).
● When doing installment, consumer actually paid more than
the cash price because of the interest charged.
● All hire purchase sales in Malaysia
are controlled by the Hire-Purchase
Act 1967 which states that the
charged on the interest should not
more than 10% per annum on a flat
rate basis.
terminologies!
Cash Price, CP = The price of items listed at the time of the purchase
Downpayment, D = Portion of the cash price of the item purchased
Balance, B = Amount financed after downpayment was made,
Periodic payment, = Amount of payment (instalment) paid every week or
R month
Total Periodic = Total amount of payment(instalment) for the whole
Payment, TPP period of the purchase.
Number of = Total number of payment to settle the balance and
payment, n the interest charged. (n = mt)
Instalment = Total amount paid by the consumer to
Purchase, IP the retailer for the item bought.
 introduction
Cash Price, CP
- Downpayment, D
Balance, B
+ Interest, I
Total Periodic Payment, TPP

Monthly Payment, R = TPP

n
Installment Purchase, IP = D + TPP

Installment Purchase, IP = CP + I
example
A student bought a Given CP = RM4300, D = RM500,
motorcycle that costs I = RM855
(a) The amount financed is a balance
RM4,300 by paying a
RM500 downpayment Cash Price, CP = RM4300
financing for the - Downpayment, D = RM 500
balance. The interest Balance, B = RM 3800
charged was RM855.
Calculate (b) The installment price is
(a) the amount of IP = Cash price, CP + Interest, I
financed = RM4,300 + RM855
(b) the instalment price. IP = RM5,155
example
A man purchased a Given CP = RM1080,
smartwatch with a cash D = 10% from CP
price of RM1,080 by n = 18,
paying a 10% R = RM65
downpayment followed
by 18 monthly payments (a) Total period payment, TPP
We can use formula TPP = B + I or from
of RM65 each. Calculate 𝑇𝑃𝑃
(a) the total period 𝑅= , we get
𝑛
payment TPP = R x n
(b) the interest. TPP = 65 X 18
(c) The installment TPP = RM1170
purchase
example (b) The interest, I
A man purchased a CP = RM 1080
smartwatch with a cash - D = 10% x RM1080
price of RM1,080 by = RM 108
paying a 10% B = RM 972
downpayment followed + I =
by 18 monthly payments
TPP = RM1170
of RM65 each. Calculate
(a) the total period I = TPP - B = RM1,170 - RM972
payment I = RM198
(b) the interest.
(c) The installment (c) Installment Purchase, IP
IP = CP + I = 1080 + 198 = RM 1278 or
purchase
IP = D + TPP = 108 + 1170 = RM 1278
 exercise
A hire purchase scheme
for a T.V. set consists of
a deposit of RM200
followed by 24 monthly
payments of RM65
each. What is the
interest charged if the
cash price of the T.V. set
is RM1,550?.
 exercise
A man buys a car that
costs RM45,000 by
trading in his old car for
RM21,000 and financing
the balance. The
repayment schedule
consists of monthly
payments of RM625
over a period of 4 years.
Calculate
(a) the interest
(b) the installment price.
 exercise
A man buys a car that
costs RM45,000 by
trading in his old car for
RM21,000 and financing
the balance. The
repayment schedule
consists of monthly
payments of RM625
over a period of 4 years.
Calculate
(a) the interest
(b) the installment price.
 interest

ORIGINAL balance REDUCING balance

• Constant Ratio Formula
• Also known as FLAT RATE
• Interest is calculate based on
method
the balance after substracting
• Using simple interest rate.
the payment.
• Interest is calculate using the
balance which remains
constant.
01
interest based on
ORIGINAL balance
 Original balance
Cash Price, CP
- Downpayment, D
Balance, B
+ Interest, I I = Brt
Total Periodic Payment, TPP TPP = B(1 + rt)

Monthly Payment, R = TPP

n
Installment Purchase, IP = D + TPP

Installment Purchase, IP = CP + I
example
A man traded in his old Given CP = RM85,000, D = RM27,000
r = 7.5%, t = 6
car for RM27,000 to
purchase a brand new CP = RM 85000
car that costs - D = RM 27000
RM85,000. To settle the B = RM 58000
balance, he obtained
+ I = Brt
financing at a 7.5% on
the original balance, to = 58000 x 0.075 x 6
= RM 26,100
be repaid by monthly
installments over 6 TPP = RM84100
years. Calculate the 𝑇𝑃𝑃 84100
monthly payment. Using 𝑅 = =
𝑛 (6×12)
R = RM1168.06
example
A housewife purchased Given CP = RM2350, D = RM 0,
r = 8%, t = 18 month
an air-fyer that costs
RM2,350. The interest of (a) I = Brt
flat rate 8% is charged, I = 2350 x 0.08 x
18 CP = RM 2350
and the housewife will 12
D = RM 0
I = RM 282 -
repay the seller in 18 B = RM 2350
monthly installments. + I = RM 282
Calculate TPP = RM 2632
(a) the interest on the
hire purchase scheme 𝑇𝑃𝑃
(b) Using 𝑅 = , thus
(b) the value of each 𝑛
2632
installment. 𝑅=
18
R = RM146.22
example Given t = 2, R = RM 275, r = 10%,
A personal loan of a B=?
certain amount is to be
repaid every month for Using 𝑅 =
𝑇𝑃𝑃
, thus
two years, being 𝑛
RM275. if the interest of TPP = R x n
10% on the original TPP = 275 x (12 x2)
balance is charged, TPP = RM6600
how much is the value
of the loan? And we also know that
TPP = B(1+rt)
6600 = B(1+0.1(2))
B = RM5500
 exercise
A manager purchased a car
that costs RM132,000 by
trading in his previous car for
RM48,000 and adding another
RM12,000. He obtained
financing at 8% on the original
balance, to be repaid by
monthly installments over 5
years. Calculate
(a) the total amount paid to the
finance company
(b) the monthly installment.
 exercise
A dining set can be
purchased by paying a
RM100 deposit followed by
18 monthly payments of
RM63.95 each.
If the interest given is flat
rate of 11%, calculate the
cash price of the dining set
(to the nearest Ringgit).
02
interest based on
REDUCING
balance
 Reducing balance
2mI
Cash Price, CP r=
- Downpayment, D B(n + 1)
Balance, B Note :
Br(n + 1) m = 52 (weekly)
+ Interest, I 𝐈=
2𝑚 m = 12 (monthly)
Total Periodic Payment, TPP

Monthly Payment, R = TPP

n
Installment Purchase, IP = D + TPP

Installment Purchase, IP = CP + I
 example
An air conditioning unit with a Given CP = RM3000, D = 10% CP
cash price of RM3000 is n= 10, m = 52, r = 10%
purchased through an
installment plan. The customer CP = RM 3000
has to pay 10% down payment - D = 10% x RM3000
and the balance will be settled = RM 300
on a weekly basis for 10 B = RM 2700
weeks. The dealer charges an
interest of 10% per annum Br(n+1)
based on reducing balance. Using I = , thus
2𝑚
By using constant ratio 2700(0.1) (10+1)
I=
formula, compute the interest 2(52)
charges. I = RM28.56
 example
The cash price of a Given CP = RM3500, D = RM500
smartwatch is RM3,500. On an r = 7%, t = 2 , m = 12, n = 24
instalment plan, RM500 is
i) The interest charged using Constant
required as a down payment
Ratio Formula
followed by monthly payments
for 2 years. If the interest rate CP = RM 3500
charged is 7% on the reducing - D = RM 500
balance, find B = RM 3000
i) the interest charged using +
Br(n + 1)
the Constant Ratio formula. I =
2𝑚
ii) the monthly payment. 3000(0.07)(24 + 1)
=
iii) the instalment price of the 2(12)
smartwatch. = RM218.75
 example
ii) Monthly payment, R
The cash price of a
CP = RM 3500
smartwatch is RM3,500. On an
instalment plan, RM500 is - D = RM 500
required as a down payment B = RM 3000
followed by monthly payments + I = RM 218.75
for 2 years. If the interest rate TPP = RM 3218.75
charged is 7% on the reducing
balance, find Using 𝑅 =
𝑇𝑃𝑃
=
3000+218.75
𝑛 24
i) the interest charged using
R = 134.11
the Constant Ratio formula.
ii) the monthly payment. iii) Installment price, IP
iii) the instalment price of the IP = CP + I = 3500 + 218.75 = RM 3718.75 or
smartwatch. IP = D + TPP = 500 + 3218.75 = RM 3718.75
 exercise
A motorbike with a cash price
of RM75000 can be purchased
by paying 10% down payment
followed by monthly payments
for 9 years. The rate of interest
is 2.88% based on reducing
balance. Using constant ratio
formula, calculate
a) The interest charged
b) The monthly payment
02
Rule of 78 in
Hire-Purchase
Act 1967
 Rule of 78
• Used to calculate the outstanding balance of any hire purchase
agreement.
• Amount of interest refunded if full payment is made before the
due.
𝑘 𝑘+1
𝑂𝑃𝐵 = 𝑅 × 𝑘 − ×𝐼
𝑛(𝑛 + 1)
Where
k = number of remaining payments
n = original total number of payments

𝑘 𝑘+1
𝑅𝑒𝑏𝑎𝑡𝑒/𝑅𝑒𝑓𝑢𝑛𝑑 = ×𝐼
𝑛(𝑛 + 1)
example Given CP = RM5000, n=30, R=RM200
A refrigerator that k = 30 – 18 = 12
𝑘 𝑘+1
cost RM5000 was Using 𝑂𝑃𝐵 = 𝑅 × 𝑘 − × 𝐼 thus,
𝑛(𝑛+1)
purchased by
CP = RM 5000
making 30 monthly
- D = RM 0
payments of RM200
B = RM 5000
each. Find the I = TPP – B
+ I =?
outstanding balance I = 6000 – 5000
TPP =R xn
just after the 18th = RM200 x 30 I = RM 1000
payment using the = RM 6000
Rule of 78. 12 12+1
𝑂𝑃𝐵 = 200 × 12 − × 1000
30 30+1
OPB = RM 2232.26
example
A computer selling for
RM8,000 cash can be Given CP = RM8000, D = 25%CP
purchased for 25% down and r = 10%, n = 24, t = 2,
24 monthly payments at 10% a) Total interest
per annum on the original CP = RM 8000
balance. Find: - D = 25% x RM8000
(a) the total interest payment = RM 2000
(b) the installment price
B = RM 6000
(c) the monthly payment
(d) the outstanding balance + I = Brt
immediately after the tenth =6000 x 0.1 x 2
payment, using the Rule of 78
= RM 1200
example
A computer selling for b) Installment price, IP
IP = CP + I = 8000 + 1200 = RM 9200
RM8,000 cash can be
purchased for 25% down and c) Monthly payment, R
24 monthly payments at 10% CP = RM 8000
per annum on the original - D = 25% x RM8000
balance. Find: = RM 2000
(a) the total interest payment B = RM 6000
(b) the installment price
+ I = RM 1200
(c) the monthly payment
(d) the outstanding balance TPP = 6000 + 1200
= RM 7200
immediately after the tenth
𝑇𝑃𝑃 6000+1200
payment, using the Rule of 78 Using 𝑅 = =
𝑛 24
R = RM300
example
A computer selling for d) Given B = RM6000, n=24,
RM8,000 cash can be k = 24 – 10 = 14
purchased for 25% down and I = RM 1200, R=RM 300
24 monthly payments at 10%
per annum on the original
𝑘 𝑘+1
balance. Find: Using 𝑂𝑃𝐵 = 𝑅 × 𝑘 −
𝑛(𝑛+1)
× 𝐼 thus,
(a) the total interest payment 14 14+1
𝑂𝑃𝐵 = 300 × 14 − × 1200
(b) the installment price 24 24+1
(c) the monthly payment OPB = RM 3780
(d) the outstanding balance
immediately after the tenth
payment, using the Rule of 78
 exercise
Maria purchased a smart
monitor that cost RM5000 by
making 30 monthly payments
of RM200 each. However,
Maria wants to settle the loan
10 months early. Find the
amount outstanding balance
that Maria need to pay using
the Rule of 78.
 exercise
A BBQ set was purchased by
making a down payment of RM100
and 10 monthly payments of
RM121.50. If the interest charged
was 1.5% based on the reducing
balance, find:
i) the instalment price of the
magazines.
ii) the cash price of the magazines.
iii) the amount of outstanding
balance just after the 8th payment
using the Rule of 78.
 exercise
A BBQ set was purchased by
making a down payment of RM100
and 10 monthly payments of
RM121.50. If the interest charged
was 1.5% based on the reducing
balance, find:
i) the instalment price of the
magazines.
ii) the cash price of the magazines.
iii) the amount of outstanding
balance just after the 8th payment
using the Rule of 78.
 exercise
A BBQ set was purchased by
making a down payment of RM100
and 10 monthly payments of
RM121.50. If the interest charged
was 1.5% based on the reducing
balance, find:
i) the instalment price of the
magazines.
ii) the cash price of the magazines.
iii) the amount of outstanding
balance just after the 8th payment
using the Rule of 78.
 the end
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