Understanding Hire Purchase in Mathematics
Hire purchase is a method of buying goods through an initial deposit followed by regular monthly payments. The total cost of the item is paid over time, which includes interest. To calculate the hire purchase price, follow these steps:
- Deposit: This is the initial amount paid upfront, usually a percentage of the total price.
- Hire Purchase Price: This is the total amount payable, including the cost of the item plus interest.
- Monthly Instalment: This is the amount paid each month, calculated by dividing the total amount payable minus the deposit by the number of months.
- Total Interest Paid: This is the difference between the hire purchase price and the cash price of the item.
For example, if a television costs Ksh 50,000, and a 20% deposit is paid:
- Deposit = 20% of 50,000 = Ksh 10,000
- Remaining amount = 50,000 - 10,000 = Ksh 40,000
- If the total hire purchase price is Ksh 60,000, then Total Interest Paid = 60,000 - 50,000 = Ksh 10,000
- Monthly Instalment = (60,000 - 10,000) / 24 months = Ksh 2,083.33.
Key points to remember
- Hire purchase involves deposit and monthly payments.
- Total hire purchase price includes interest.
- Monthly instalment is calculated over the payment period.
- Total interest paid is the difference from cash price.
Worked example
A fridge costs Ksh 80,000 with a 15% deposit. Calculate the deposit, hire purchase price, and monthly instalment for 24 months.
- Deposit = 15% of 80,000 = Ksh 12,000.
- Hire Purchase Price = 80,000 + Interest = Ksh 100,000.
- Monthly Instalment = (100,000 - 12,000) / 24 = Ksh 3,666.67.