The Hypothetical Finance Ltd has structured a hire-purchase deal. The required downpayment is 20 per cent of the investment cost.
The hire-term is four years with quarterly payments in advance. The flat rate of interest is 13 per cent. The finance company would charge a front end documentation and service fee and allow rebate for prompt payment at 0.5 per cent and 1 per cent of investment outlay respectively. Assuming after paying 24th installment, a hirer wishes the purchase option, what is the interest rebate according to (i) actuarial method, (ii) rule of 78 method and, (iii) SLM?
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In a hire-purchase agreement the buyer gets immediate custody of the goods purchased and has to pay for them over an extended period of time in the form of regular installments. Only after all the installments are paid does ownership of the goods pass on to the buyer. In case any installment is not paid, the seller can take possession of goods and sell them to recover the remaining cost.
The question you have asked is about a hire-purchase agreement with a term of 4 years and payments have to be made on a quarterly basis. This makes the total number of installments equal to 4*4 or 16.
As the person is already the owner of the product after 16 installments there is no necessity to make 24 payments as that would imply paying 8 extra installments after gaining ownership.
Due to this inconsistency, the interest rebate you require cannot be determined.
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