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Calculation of interest on hire purchase

The hire purchaser is required to pay series of instalments over a period of the agreement.
Each instalment comprises of the capital amount for the cash price of the asset and interest
expense. The instalments paid in hire purchase agreement may be equal, but the interest
element in each instalment depends on the method of apportionment. The common
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methods used to apportion interest payable in each instalment include the following; the
straight-line method, actuarial method and sum of years’ digit method. Although, the
total amount of interest will be the same in all the three methods, the interest amount in
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each instalment will differ.
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Straight line method for apportioning a hire purchase interest
Under this method, the total interest is divided evenly over the number of instalments.
The formula used is as follows:
Total hire purchase int erest
The hire purchase interest per instalment =
Total number of instalments
Where, the total hire purchase interest is the difference between the hire purchase price
and the cash price. When the interest rate is given, the hire purchase, the hire purchase

interest per instalment can be calculated using the following formula:

Hire Purchase Interest per Instalment = (Hire Purchase Price – Cash Price) x Interest Rate
Example 8.1
On 1 January 2024 Joyma Ltd. acquired a motor vehicle from Cheka Ltd. on hire
st
purchase. The terms of agreement were as follows:

Details TZS

Cash price 18,000,000
Down payment 3,000,000
Hire purchase price 19,500,000
Nominal rate of interest is 20%

Number of annual instalments is five (5)

Required: Using the straight-line method, calculate the amount of interest to be
included in each instalment.

Student’s Book Form Five
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