Flat Rate And True Rate

Notice particularly that the quoted rate of interest is a flat rate, by which is meant that it is calculated on the original amount borrowed for the whole of the credit period. But since the purchaser is repaying part of his borrowing each month he is in effect paying interest on money he is not borrowing! Indeed, a flat rate over one or two years works out at a true rate of about twice the flat rate. The true annual percentage rate of interest under a credit sale agreement ranged in 2015 from 24% to 27%. Rates vary, of course, from shop to shop.

Hire purchase

Buying on hire purchase is very similar to buying on credit sale agreement. But there is one important difference. When an article is acquired on HP the legal contract that the customer makes with the supplier is that the customer will hire the item for the duration of the contract, paying a 'rental' for its use, and will have the option to purchase it for a nominal sum at the end of the period. There is thus a legal distinction between a hire-purchase contract and any other form of instalment purchase, for under HP the goods remain the property of the supplier until the final payment is made. Until that moment the supplier has certain rights of regaining possession of the goods should instalments fall into arrears (although the purchaser now has valuable legal safeguards that need not be gone into here).

Under any other form of credit the supplier has no rights of repossessing the goods. He can, of course, sue on the debt.

Example

Retail price of goods 249

Deposit paid 49

Balance outstanding 200

Interest charge at 19.5% per annum for one year 39

Balance to be paid in 12 monthly instalments of £19.92 239

Total credit price (£249 + £309) 288

The true rate of interest in this case works out at about 38% per annum. This is unusually high and a better deal could probably be obtained by shopping around.


Credit Sale

The second method of obtaining instalment credit is slightly less flexible than a charge account in that the period of repayment and the monthly instalment are both fixed at the outset. It is thus what might be called a 'structured loan' in that the structure of the complete transaction is predetermined. The usual name for this arrangement is 'credit sale'. The interest charge is lower than for extended credit under a charge account.

Under a credit sale agreement a purchaser agrees to pay a cash deposit at the time of purchase. The deposit required ranges upwards from 10% depending on the... see: Credit Sale


Refunds, Personal And Business Finance 2017

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