Lecture 8

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Installment Purchases

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INSTALLMENT PURCHASES
Alternative to buying by cash Down payment is made before

obtained financing Making equal periodic payments You are paying more than the cash price You are paying the interest charges and the insurance and finance charges as well.
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TYPES OF INSTALLMENTS
Financing on installments usually on
Housing loan uses amortization Hire purchase cars, computers, furniture,

electrical appliances

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INTEREST CHARGED ON AMOUNT FINANCED (FLAT RATE) SIMPLE INTEREST Amount Financed = Cash Price Down Payment

Monthly Payment = AF + total Interest no. of T. Amount Paid = of Interest = Amount payments monthly Paid Amount
payment = MP x total no. of payments
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Financed Installment Price = DP + T. AP = CP + I

EXAMPLE
Farah bought a TV priced at RM800 cash through an installment plan. She paid RM100 as a down payment. The balance was settled by making 10 monthly installments. If the interest rate charged 8.5% per annum on the amount financed, find (i) interest charged; (ii) installment price; (iii) monthly payment.
Amount financed= cash price down payment = 800 100 = 700 Interest = 700 x 0.085 x 10/12 = 49.58 Installment price = cash price + total interest = 800 + 49.58 = 849.58 Monthly Payment = 700 + 49.58 / 10 = 74.96

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PRACTICE
1.

A man purchased a microwave with a cash price of RM1,080 by paying 10% down payment followed by 18 monthly payments of RM65 each. Find the amount financed the interest A student bought a motorcycle that costs RM4,300 by paying a RM500 down payment and obtaining financing for balance. The interest charged was RM855. Calculate The amount financed The installment price

1.

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INTEREST CHARGED BASED ON REDUCING BALANCE

Applied at the balance due at the time of each payment 2 methods

1. Annuity/ amortization method 2. Constant Ratio Method

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ANNUITY METHOD
PVA = PMT [ 1 - (1 + r) -t] r PMT = PVOA (r) 1 - (1 +r) -t

A washing machine is selling for RM2,000 cash. Through an installment purchase, the buyer has to pay RM400 down and 10 monthly installments. If the interest charged 8% per annum on reducing balance, using annuity method find (i) total interest charged; (ii) installment price; (iii) monthly payment. PMT = 1600 (0.08/12) 1 - (1 +0.08/12) -10 = RM165.93 Total Interest = (165.93 x10) 1600 = 59.30 Installment price = 2000 + 59.30 = 2,059.30
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CONSTANT RATIO FORMULA

Frequently used to approximate the actual annual percentage rate (APR) or the effective rate

r = 2MI B(n+1)

I = B(n+1) r 2M

r = annual interest rate/ effective rate M = 12 (monthly installment) or 52 (weekly installment) I = total interest charged B = original outstanding balance n = total no. of installments

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EXAMPLE
A washing machine is selling for RM2,000 cash. Through an installment purchase, the buyer has to pay RM400 down and 10 monthly installments. If the interest charged 8% per annum on reducing balance, using Constant Ratio method find (i) total interest charged; (ii) installment price; (iii) monthly payment.
Total interest (I) = 1600(10+1) 0.08 2(12) = 58.67 PMT = 1600 + 58.67/ 10 = 165.87 Installment price = 2000 + 58.67 = 2,058.67

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EXAMPLE
Man purchased a RM4,000 computer. He has to pay RM2000 down payment and 20 weekly payments of RM110 each. Find the approximate effective rate that is charged by using Constant Ratio.

Amount Financed = 4000 2000 = 2000 Interest = (110 x 20) - 2000 = 2200 2000 = 200 r = 2((52)(200) 2000(20+1) = 20800/42000 =0.495 = 49.5%

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PRACTICE
1.

2.

3.
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A computer is being sold for RM5,000 cash. Through an installment purchase, the purchaser has to pay RM1,000 down payment and 12 monthly installments. The interest charged is 12% per annum on reducing balance. Using annuity method, find Monthly payment Installment price Total interest charged Maimun bought an RM8,000 hi-fi set through an installment plan. She has to pay RM4,000 down payment and 10 monthly payments of RM450 each. Using Constant Ratio formula, find Total interest charged Installment price Simple interest rate charged Approximate effective rate An electric guitar priced at RM300 cash. The guitar can be purchased for RM50 down payment and RM13 a week

UNEQUAL INSTALLMENT PAYMENTS AND REPAYMENT SCHEDULE

Roslyn bought a TV worth RM3000 on an installment basis in which she was charged 1.25% per month on any outstanding balance. She made a RM1000 down payment and paid RM600 every month. Find the number of payments she made and the value of the final payment. Construct a repayment schedule. Month Amount Interest Payment Outstanding Owed Balance
0 1 2

2000 2025 1442.81 853.35 253.35

2000 x 0.0125 = 25 1425 x 0.0125 =17.81 842.81 x 0.0125 =10.54 253.35 x 0.0125

600 600 600 256.52

2000 1425 842.81 253.35 0

4
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PRACTICE
Habib bought a RM4,600 stereo set on an installment basis in which an interest of 1% per month on any outstanding balance was charged. He made a RM1,000 down payment. For the balance, she had to pay RM600 every month (principal payment) plus any interest due. Construct a repayment schedule to show the monthly payments.

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