Hire Purchase and the Rule of 78

May 13, 2019

Picture this. “You’ve purchased a refrigerator on Hire Purchase for a term of 36 months. You’ve been cautious with your payments and have managed to pay off the item completely in 12 months. There is a sense of accomplishment with now owning the good outright and you look at perhaps purchasing another item now that you no longer have payments. However, did you know that early repayments entitle you to rebate.”  

Many consumers are not aware that if they pay off their Hire Purchase agreements before the actual due date, they are eligible for a rebate. This is in accordance with Section 25 of the Consumer Credit Act and the Rule of 78.

What is the Rule of 78? 

The Rule of 78 provides a formula to calculate the interest rebate that consumers are eligible for if they pay off their Hire Purchase Agreements before the due date. 

How is it calculated? 

The below provides a step-by-step example of how this can be calculated. 

Hire Purchase Agreement was entered-into on 23rd November 2018;

Hire Purchase Agreement (Term): 36 months

Total Interest charged over 36 months: $2,548.35;

Account has been settled in the 10th month. 

Step 1: Calculate the sum of total number of months in the credit agreement

If the credit agreement is for a term of 36 months then, you will need to add all the numbers from 1 to 36. That is: 

1 + 2 + 3 + ……. + 35 + 36 = 666.  

Step 2: Calculate the sum of total number of incomplete months in the credit agreement

If the account was settled in the 10th month then, the total number of incomplete months will be 26 months (36 – 10= 26). 

Therefore, the sum of incomplete months will be calculated as: 1 + 2 + 3 + ….. + 25 + 26 = 351. 

Step 3: Calculating the total interest charge for the number of complete months 

Given steps 1 and 2 above, the total interest charge can be worked out by subtracting the sum of the incomplete months (351 from step 2) from the sum of the total number of months (666 from step 1) and then, dividing this product by the sum of the total number of months (666 from step 1). 

In this case, it will be done as: 

(666−351)/666 = 0.47297 

This answer will then be multiplied by the total interest charged ($2,548.35) and it will give you the total interest that has already been paid by the consumer over 10 months. 

Therefore, in this case – the interest charged for the 10 months will be calculated as: 

0.47297 x $2,548.35 = $1,205.30  

Step 4: Calculating the total rebate amount 

To calculate the interest rebate amount, the interest charged for 10 months ($1,205.30) will be deducted from the total interest charge under the credit agreement ($2,548.35)

That is: $2,548.35 – $1,205.30 = $1,343.05. 

Therefore the consumer is eligible for a rebate of $1,343.05. 

Consumer Advice

The Consumer Council is concerned for consumers who have settled their hire purchase accounts before the expiry of the credit agreement and have not been informed of their qualification for an interest rebate. Nor are they educated on how to check if they really qualify. 

It is apparent after several complaints made to the Council that some hire purchase companies do not state the remainder account balance in the payment receipts. Due to this, gullible consumers who are overjoyed with acquiring complete ownership of the goods upon early settlement, fail to realize that they qualify for a refund of the interest paid for the unused duration of the credit agreement. 

The Council also wishes to advise consumers not to be enticed when traders offer them to purchase more items based on their eligibility but to try and pay off their existing accounts before making additional purchases.  Additional purchases will not only be credited to the existing account but will also lengthen the indebtedness.  

Consumers are advised to check their Hire Purchase agreements and always ensure that they enquire about the interest rebate. Consumer who need further clarification can call the National Consumer Helpline on Toll Free Number 155 or visit our offices at Level 5 Vanua House Suva, Suite 4 Popular Building Lautoka and Level 1 Lot 41 Raza Properties Labasa.