When in the market to find assets on hire purchase, it is crucial to invest time and effort learning about hire purchase agreements. It is important to understand differences between hire purchase and cash purchase. This helps you prepare for the deal financially and ensure you make the correct decision.
Differences between hire purchase and cash purchase
There are several differences between buying on hire purchase and purchasing an asset outright. One such difference is ownership of the items. In cash purchase, you acquire the products immediately after the payment and also become the owner. In the case of hire purchase, you acquire the asset after making the down payment. However, you only become the owner after paying the last installment.
Another difference between cash purchase and a hire purchase is the total cost of the asset. The price of the asset is lower in the case of cash purchase. The differences between the cost are caused by the interest rate charged on the installments.
Hire purchase calculations
Hire purchase cost
This is the total cost of a given item when one buys it using a hire purchase agreement.
Total amount paid = Deposit + installments
Example:
A buyer purchased a TV on hire purchase terms. After making a down payment of Ksh 5,000 he paid 12 monthly installments of Ksh 2000. What was the total cost of the TV?
Total cost = 5,000 + (12 x 2,000)
Cost= 5000 + 24,000
= Ksh 29,000
Interest
This is the difference between the cash price and hire purchase cost.
Interest = total amount paid – cash price
Example:
A buyer purchased furniture for using hire purchase terms. After making an initial deposit of Ksh 10000, he made Ksh 4000 monthly installments for 10 months. If the original price of the furniture is Ksh 45000, what was the interest charged?
Interest = Hire purchase cost- cash price
= (10000 + (10 X 4000)) -42000
= (10000+ 40000) – 42000
= 50000 – 45000
= Ksh 5000
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