Financial Literacy for Everyone
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Hire Purchase

You can buy furniture or appliances, as well as other expensive items, using a Hire Purchase (HP) agreement. The store where you buy something normally arranges finance for you from banks that specialise in this type of loan.

The store usually requires you to pay a deposit and sign an agreement. The agreement states that a Hire Purchase loan is given for the item that you buy. The item will only be yours when you have paid the last instalment.

An example of how an HP agreement for a fridge works is the following:

If the fridge costs R3 600 and you have to pay a 10% deposit, the deposit will be R360. You will then borrow the balance (R3 600 - R360 = R3 240) from the store at an interest rate. The store will tell you over how many months you have to pay back the loan and what your monthly instalment will be. If you pay a bigger deposit, you need to borrow a smaller amount and the total amount of interest you will pay will be lower.

Another example: the difference between paying off the HP over three years versus paying it off over two years:

You buy a fridge for R1 500 and the store suggests you pay it off over three years with an instalment of R50 per month. What will your total payments for the three years come to? How much interest would you have paid at the end of the three years?

You do the calculation as follows:

Total payments:
3 years = 3 x 12 = 36 months
R50 per month x 36 months = R1 800

Total interest paid:
Total amount paid R1 800
Minus original price tag R1 500
Total interest paid R300

The fridge with a price tag of R1 500 will cost you R1 800. You will pay R300 in interest.

If you pay this same fridge with a price tag of R1 500 off over two years instead of three years, your monthly premium will be higher, namely R70, but the total amount you pay will be lower.

It is calculated as follows:

Total payments:
2 years = 2 x 12 = 24 months
R70 per month x 24 months = R1 680

Total interest paid:
Total amount paid R1 680
Minus original price tag R1 500
Total interest paid R180

Therefore, even if you pay R20 per month more for the fridge, but pay if off over two years instead of three, you would have saved R120.