Maximize Your Money: Hire Purchase Loan.

I always love to talk about hire purchase loan more often because it is the most misunderstood loan in the market. I have seen friends and families who have been making the same mistakes over and over again. I’ll open your eye and show you the right way of managing your hire purchase loan. Before you proceed, go through ‘Back 2 Basic: Hire Purchase Loan’. Now, start your engine and ready to roll on.

(Note: All this maximization will work in Islamic loan as well)

Let’s look at some common tips (truth) about hire purchase loan.

1. Always take the shortest tenure

The reason is very simple, the longer your tenure is, the higher your effective interest rate will be. Remember that, hire purchase loan would calculate your interest using the borrowed amount multiply the number of years, which will increase your effective interest rate. Not just that you’ll be paying a very high interest in the first year itself.

2. Take the least amount of loan possible.

I have come across many car dealer advertising ‘0% down payment’ or ‘100% loan’. Some who might have some additional cash to pay for down payment would just take the 0% down payment offer. He might even be proud that he doesn’t have to put any money to buy the car. But, the effect is huge. With the amount of effective interest you’ll be paying, you’ll be losing in interest. If your loan interest is 5%, a $5,000 down payment would save you $1,250 for 5 years tenure and $1,750 for 7 years tenure. So, take the least loan.

3. Do not make additional payment

“What don’t make any additional payment? Are you crazy?” some might start to think I’m crazy. The reason is very simple; your additional payment won’t be reducing your hire purchase loan interest. You will only reducing your payment period, but not the interest at all. The next tip will make understand way making additional payment is a waste and teach a better way of making additional payments.

4. Pay at the end of grace period/due date.

You''ll be usually given 7 days period from billing date or beginning of the month to pay your installment. Many might even pay them on 1st day itself. Some might pay them even before the beginning of the month. By paying earlier, you are not gaining anything, as you are not reducing interest. In fact you are only helping the bank. So, try to pay at the end of grace period around 6th or 7th day. (Just don't exceed your due date)

So far, whatever tips you read might be quite common found everywhere. The next final tip is what will make you different than others. It is how you maximize your hire purchase loan.

"Whatever additional payment, save them instead."

That’s right, if you are going to make additional payment, save that money in savings, fixed deposit or unit trust, whichever you are feeling comfortable with. Save them into something which could give a return with low risk. Then, when your saving amount is equivalent to your balance minus rebate, pay them off one shot. Let’s have a look at illustration below.
Mr. Karipap never made any additional payment, while Mr. Dodol made additional payment all the time.


Now, let’s look at Mr. Cekodok. He maximized his money by saving the money for additional payment in a fixed deposit of 3% p.a interest. The below calculation done based on monthly savings.


Just imagine, how much you could save if you had invested in something which could give 5% return.

All in all, whenever you are going to buy car or getting any other hire purchase or Islamic loan, follow the tips above to maximize your money and towards a better money management.

Good luck and all the best.