Assuming interest rate of 2.85 percent, 7 years (84 months) tenure and 90 percent financing margin for a vehicle costing $ 100,000:

**Step 1**

Calculate total balance payable to bank

Balance payable to bank = 90,000 x (1 + 7 x 0.0285) = $ 107,955

**Step 2**

Calculate monthly hire purchase repayment

Monthly loan repayment = 107,955/84 = $ 1,285.18

**Step 3**

Use this online financial calculator, and key in the values as such

Real monthly interest rate paid to bank = 0.4425 percent

**Step 4**

Multiply answer in Step 3 by 12

Annual interest rate paid to bank = 0.4425 x 12 = **5.31 percent**

My own hire purchase agreement refers this as *Annual Percentage Rate of Term Charges.*

Too lazy to follow the 4 steps above?

I thought so. Just **click here** to download the exact excel sheet I used to compute this. You only need to fill in the yellow cells and the rest of the calculation will be done for you.

Isn’t it a great feeling when you are able to demystify banks’ inner workings? 🙂 It’s actually no big deal for any certified financial planner (which I am) – you are welcome!

## 10 replies to "Hire Purchase Secret#1: How Bank Calculate Your Car Monthly Instalment"

if car loan interest rate is at 2.6% (but 4.92% real annual) by keeping my money in FD with interest of 3% i will rugi?

its ok i read comments at the other article thanks

I tried it out d. Of course by using all the tools I do get the exact answers but i still don’t get the logic towards getting the answer. Sorry for being so noob! -,-!!

Hi brother, it’s okay, it beats me too initially. But just look at it this way :

For Home mortgage, the interest rate quoted by bank is your annual interest rate over your outstanding principal amount. This is the interest paid to bank annually. Straightforward yes? And people thought home mortgage calculation is hard due to amortization, but it’s really direct.

However, for Hire Purchase, the interest rate quoted – bank multiply this with the number of financing years AND the purchase price of your vehicle. So you have – HP interest rate x Years x Vehicle price = Total interest paid over your financing years. Then, you add this Total Interest Paid to your original Vehicle Price. This is Total Money you Pay to Bank.

Hence, you take this Total Money Paid to Bank, divide by the number of financing Months, you got your monthly instalment.

This monthly instalment, well, to simplify things, you compare it with the monthly instalment if you were to buy this car WITHOUT any interest. The difference is your monthly interest rate.

Then, this monthly interest rate, you multiply it by 12, to become annual interest rate which is comparable to home mortgage interest rate.

Cheers, LCF

This is interesting. So like that all this while the banks are cheating us or what? =,=! So next time we must ask for lower rate already after knowing about this.

Hi KampungInvestor, in the HP agreement, they actually state this clearly – the Real Annual Percentage Rate but banks never actually explain this to customer unless you ask. But if customers don’t know what they don’t know – I wonder what’s there to ask? 🙂

That’s why it’s not cheating but a blindside 🙂

Cheers

LCF

So if we ask can we get a discount or rebate? Anyway how you calculate the rate? I used normal calculations, i still don’t get 5.31%.. -,-!!

I’ve provided the link above to download the actualy excel sheet. Try it out bro!

Cheers

LCF

Hi, how come you took RM 100,000 to calculate Step 1 when you only took a 90% loan from the bank?

thanks

Hi Justin, thanks for being so observant. Yes, I corrected the typo in Step 1 to 90,000, not 100,000. The rest of the calculation is correct (sum paid to bank = 107,995)

Cheers

LCF