When it comes to making a large purchase, not everyone has the funds available upfront. This is where hire purchase agreements come in. A hire purchase agreement allows you to purchase an item by paying for it over a period of time, usually with interest added on. But how do you calculate the total cost of a hire purchase agreement? This is where the hire purchase agreement formula comes in.
The hire purchase agreement formula calculates the total cost of a hire purchase agreement, including the initial deposit, monthly payments, and interest charges. Here`s how it works:
First, you need to determine the cash price of the item you want to purchase. This is the price you would pay if you were purchasing the item outright, without a hire purchase agreement.
Next, you need to determine the deposit amount. This is the amount of money you will pay upfront when you enter into the hire purchase agreement. The deposit amount is usually a percentage of the cash price of the item.
Once you have determined the cash price and deposit amount, you can calculate the amount of credit you will be taking out. This is simply the difference between the cash price and the deposit amount.
Now you need to calculate the interest charges. The interest rate will be specified in the hire purchase agreement, and is usually expressed as an annual percentage rate (APR). To calculate the interest charges for each month, divide the APR by 12 (for the 12 months in a year). Then, multiply this monthly interest rate by the amount of credit you will be taking out.
Next, you need to calculate the total amount of repayments you will be making. This is simply the sum of all the monthly payments you will be making over the term of the hire purchase agreement.
Finally, you can calculate the total cost of the hire purchase agreement by adding together the cash price, the interest charges, and the total amount of repayments.
Here is the hire purchase agreement formula in full:
Total cost of hire purchase agreement = cash price + interest charges + total amount of repayments
Interest charges per month = (APR/12) x amount of credit
Amount of credit = cash price – deposit amount
While hire purchase agreements can be a convenient way to purchase a large item without having to pay for it all at once, it`s important to understand the total cost of the agreement before entering into it. By using the hire purchase agreement formula, you can calculate the total cost and make an informed decision about whether a hire purchase agreement is the right option for you.