You want to buy something special but don’t have the cash upfront to pay for it. So, you would like to pay it off in monthly instalments. Knowing how to calculate simple interest will help you to work out if you can afford to pay for the goods over time. Now get your calculator, pen and paper ready!
Example: You want to buy a laptop which you saw advertised for R3500 on the internet. The advert says that no deposit is required and that the full amount must be paid off over 24 months at an interest rate of 7,5% p.a.
You want to work out if you can afford to go ahead with the deal. But how much money will you have to pay every month? Let’s work it out…
First, look at the information you have in the statement: you know the sales price, the interest rate and the payment period (the number of months over which payment must be made). And, you know that you don’t have to pay a deposit.
Selling price: R 3500
Interest rate: 7.5% per annum – this means that each year you pay an additional 7.5% of the initial value of the goods (NB: an interest rate is shown as a percentage, which means that when turned into a fraction, i.e. 7.5/100 = 0.075 – it is easier to use the fraction when making the calculation)
Repayment period: 24 months, which is two years (i.e. 24/12 = 2)
Formula for the final amount to be paid:
Final amount = Selling price + (Selling price X Interest X Number of years)
= 3500 + (3500 X 0.075 X 2)
= R3500 + R525
This means you will pay R525 extra for the laptop.
Formula for the monthly instalments:
Monthly instalments = Final amount/Number of months
Therefore, because R4025 is the final amount you will have to pay over 2 years, you must divide it by 24 to work out the monthly instalments.
Therefore, the monthly instalments are:
= R 167.70
This means that each month for the next two years you would need to have set aside R167.70 to cover the cost of the laptop.
Importantly, companies often also charge administration fees, so you will need to read the contract carefully and ensure that you do know exactly how much these are and how they will affect the repayments.
Never sign a purchase agreement without reading it carefully and ensuring that you do understand your obligations. Always make wise decisions where your money is concerned.
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