INSTALLMENT PURCHASE

Items like electrical appliances can either be purchased on cash term or installment basis. In
an installment purchase, a down payment is made followed by a series of regular payments
(usually monthly or weekly).

There are many retailers and wholesalers who sell their products on an installment basis.
You can buy an electrical item by paying a number of weekly or monthly installments. When
you are an installment buyer, you are actually paying more than the cash price. The
difference is the interest you have to pay for the credit given to you by the seller (unpaid
balance), plus insurance and finance charges.

Interest charge based on original balance

For an installment purchase, when interest charge is based on the original balance, the
simple interest formula is used to calculate interest. Several expressions such as charge
based on original unpaid balance charge based on simple interest rate and charge based on
flat rate are common used in installment purchases but they all mean the same thing.

Normally, an installment purchase requires a down payment.

Original balance = cash price down payment

The total amount paid in an installment plan by the buyer is called installment price; that is,

Installment price = cash price + total interest

OR

Installment price = Down payment + total monthly payment

monthly payment

original balance int erest

number of payments

Interest charge based on reducing balance

Interest rate charged on reducing balance is an annual rate which is applied only to the
balance due at the time of each payment.
The constant ratio formula can also be used to calculate the total interest charged if the
interest rate on the reducing balance is given, that is,

2mI
Bn 1

where
r is annual interest rate
m is 12 for monthly installments and 52 for weekly installment
I is the total interest charged
B is the original outstanding balance
n is the total number of installments
EXERCISES

1.

Romy bought a computer at a cash price of RM5000 through an installment plan with
no down payment. He paid the monthly payment of RM300 for 24 months. Find

2.

a)

the installment price

b)

the total interest charged

A computer was purchased by making a down payment of RM1500 and 24 monthly

payment of RM115 each. If the interest rate was 6% on the original balance, calculate

3.

a)

the installment price of the computer.

b)

the cash price of the computer.

c)

the effective rate using the constant ratio formula.

The cash price of an encyclopedia set is RM2999. If it is purchased on a 24-month

installment plan with a RM500 down payment and the interest charge of RM250, find
a)

the interest rate based on the original balance;

b)

the installment price

4.

Aina bought a laser printer on an installment plan which she had to pay a 25% down
payment. The remaining balance of RM1300 was settled by making 15 monthly
installments. The interest charged was 9% on reducing balance. Compute

5.

a)

the monthly installment using the constant ratio method;

b)

the installment price of the printer.

The cash price of a speed boat is RM60,000. Under an installment plan, a buyer may
pay a 30% down payment followed by monthly payments for 5 years. If the interest is
6% on the reducing balance, by using the constant ratio formula, calculate

6.

a)

the amount of interest,

b)

the monthly payment,

c)

the installment price of the speed boat

Farah bought a digital quran listed at RM800 cash through an installment plan. She
paid RM100 as a down payment. The balance was settled by making ten monthly
installment. If the interest rate charged was 6.5% per annum on the original balance,
find

7.

a)

the total interest charged

b)

the installment price

c)

the monthly payment

Puan Sri bought an electric appliance through an installment plan in which she paid
RM200 down. She had to make 12 monthly payments of RM120 each to settle the
unpaid balance. If the dealer charged her an interest of 5.5% per annum on the
original balance, find the cash price of the item.

8.

A grandfather clock is being sold for RM3000 cash. The buyer has to pay RM450 as
down payment and 10 monthly installments. If the interest charged is 6.5% per annum
on the reducing balance. By using the Constant Ratio formula, find

9.

a)

the total interest charged

b)

the monthly payment

c)

the installment price

Siti purchased a RM8800 leather sofa set through an installment plan. She has to pay
RM1500 as down payment and 24 monthly payments of RM350 each. Find the

10

a)

installment price

b)

total interest charged

c)

flat rate (simple interest rate) charged

Salleh purchased RM4000 TV. He has to pay RM1000 as down payment and 30
weekly payments of RM150 each. Find the approximate effective rate that is charged
by using the Constant Ratio Formula.

11.

An electric oven is priced at RM500 cash. A cash purchase is entitled to a 10%

discount. The oven can be purchased for RM50 as down payment and RM30 a week
for 20 weeks. Find the approximate effective rate charged to the installment buyer by
using the Constant Ratio Formula.