Hire Purchase Calculator (Flat Rate to True Rate)

If your hire-purchase quote uses a flat rate, enter it to estimate the instalment and the reducing-balance equivalent. Check the agreement for fees, insurance and settlement terms before comparing offers.

As quoted on the agreement

Anything rolled into the financed amount.

Monthly instalment

LKR 21,333

60 instalments on LKR 800,000 financed

A 12% flat rate is really about 20.3% reducing balance

Flat interest is charged on the full original amount for the whole term, even though you owe less every month. A bank loan quoted at 20.3% would cost you the same. Compare that figure, not the flat rate.

Quoted flat

12%

True reducing balance

20.3%

+8.3 points

What the agreement costs

Cash price
LKR 1,000,000
Down payment
- LKR 200,000
Amount financed
LKR 800,000
Flat interest
LKR 480,000
Total of instalments
LKR 1,280,000
Total paid, including the deposit
LKR 1,480,000

Interest is 60% of the amount financed across the term. Settling early rarely saves the full remaining interest on a flat-rate agreement — ask for the settlement figure in writing before you commit.

Why a flat rate costs roughly twice what it says

A flat rate charges interest on the original amount for the whole term. By the final year you owe a fraction of what you borrowed, but you are still paying interest as though you owed all of it.

Across the term your average outstanding balance is roughly half the original amount, which is why a flat rate works out to nearly double the equivalent reducing-balance rate. The exact multiple depends on the term.

What a flat rate really costs, by term
Flat rateTermReducing-balance equivalent
10%3 yearsabout 17.9%
10%5 yearsabout 17.3%
12%3 yearsabout 21.2%
12%5 yearsabout 20.3%
15%5 yearsabout 24.7%
18%5 yearsabout 28.9%

Comparing a hire purchase quote against a bank loan

Quotes can use different rate bases. Check whether each offer uses flat or reducing-balance interest before comparing headline rates.

Convert the flat rate to its reducing-balance equivalent first, then compare. A 12% flat hire purchase offer and a 15% bank loan are not close - the bank loan is substantially cheaper.

  • Ask the finance company for the effective annual rate in writing.
  • Check whether insurance and registration are inside or outside the financed amount.
  • Confirm what the early settlement figure would be before signing.
  • A longer term widens the gap between the flat rate and what you actually pay.

Early settlement rarely saves what you expect

On a reducing-balance loan, paying off early stops interest accruing from that day. On a flat-rate agreement the entire interest charge was calculated at the outset, and what you get back on settlement is governed by the agreement rather than by recalculating from the balance.

Some agreements rebate a proportion of unearned interest and some rebate very little. Ask for the settlement figure in writing before assuming an early payoff is worth making.

More finance tools

Frequently asked questions

A flat rate charges interest on the original amount for the entire term, regardless of how much you have repaid. A reducing-balance rate charges only on what is still owed, so the interest falls every month. Because your average balance across the term is roughly half the original amount, a flat rate costs nearly twice what the same number would cost on reducing balance.

About 20% on a reducing balance over five years - 20.31% on these figures. The exact figure moves with the term: the same 12% flat works out at roughly 21.2% over three years and 19.5% over seven, because a longer agreement spreads the same fixed interest charge across more payments.

The calculator takes the instalment produced by the flat quote and solves for the reducing-balance rate that would produce that same instalment. There is no closed-form formula for that rate, so it is found numerically. The result is the number to compare against a bank loan quote.

Usually not in full. On a flat-rate agreement the whole interest charge is calculated at the outset, and early settlement rebates are governed by the agreement rather than by simple recalculation. Ask the finance company for a written settlement figure before assuming an early payoff saves what it would on a reducing-balance loan.

They are structured differently. Under hire purchase you own the asset once the final instalment is paid; under a finance lease the lessor retains ownership and you may have an option to purchase at the end. The interest arithmetic is often quoted the same way, so the flat-to-effective comparison applies to both.

You cannot do it with a fixed multiplier, though doubling is a reasonable first approximation. Properly, you work out the instalment the flat rate produces, then solve for the reducing-balance rate that would give the same instalment over the same term - which is what this calculator does.

It is not always more expensive. A flat-rate quote can look cheaper than a reducing-balance quote with a higher headline number, even when its total repayment is higher. Convert both to the same basis and include fees before comparing them.

The consequences are set by the agreement and can include late charges and, on secured facilities, repossession of the asset. Because the lender typically retains rights over the goods until the final payment, missing instalments on hire purchase tends to escalate faster than on an unsecured loan. Talk to the lender before defaulting.