Hire Purchase Secret#1: How Bank Calculate Your Car Monthly Instalment

Assuming interest rate of 2.85 percent, 7 years (84 months) tenure and 90 percent financing margin for a vehicle costing $ 100,000:

Step 1

Calculate total balance payable to bank

Balance payable to bank = 90,000 x (1 + 7 x 0.0285)  = $ 107,955

Step 2

Calculate monthly hire purchase repayment

Monthly loan repayment = 107,955/84 = $ 1,285.18

Step 3

Use this online financial calculator, and key in the values as such

hire purchase calculation

Real monthly interest rate paid to bank = 0.4425 percent

Step 4

Multiply answer in Step 3 by 12

Annual interest rate paid to bank = 0.4425 x 12 = 5.31 percent

My own hire purchase agreement refers this as  Annual Percentage Rate of Term Charges.

Too lazy to follow the 4 steps above?

I thought so. Just click here to download the exact excel sheet I used to compute this. You only need to fill in the yellow cells and the rest of the calculation will be done for you.

Isn’t it a great feeling when you are able to demystify banks’ inner workings? 🙂  It’s actually no big deal for any certified financial planner (which I am) – you are welcome!