Introduction
Shops and retailers look for way to encourage people to make purchases. This section will look at a variety of the common purchasing options.
Deposit: an initial, partial payment for the cost of an item.
Balance: the amount owing after a deposit has been paid, i.e \text{cost}-\text{deposit}=\text{balance}
Interest: an amount charged for loaning you the amount of the balance. Usually calculated as a percentage of the balancing owning using the compound interest formula.
Repaymenta fixed amount paid at regular time periods to pay back the balance.
Ideas
Cash payment
A number of shops offer discounts to people who pay cash for their purchases. This is because cash, unlike other payment methods such as credit card, ensures the retailer receives the money straight away and without incurring any transaction fees. Most retailers offer a percentage off for paying cash.
This is the most simple of all the options, and perhaps increasingly the least common. If you are purchasing a low-cost item, such as a coffee, or your bus ticket, you might pay for these with the cash you have handy.
Examples
Example 1
Han purchases a drill selling for \$400 at a hardware store.
Calculate the amount he has to pay if he receives a trade discount of 7\%.
Calculate the amount he has to pay if he pays with cash and receives a further discount of 10\%.
Terms to remember:
Deposit: an initial, partial payment for the cost of an item.
Balance: the amount owing after a deposit has been paid, i.e \text{cost}-\text{deposit}=\text{balance}
Interest: an amount charged for loaning you the amount of the balance. Usually calculated as a percentage of the balancing owning using the compound interest formula.
Repaymenta fixed amount paid at regular time periods to pay back the balance.
Lay-by
Lay-by is a method of payment, where an initial deposit is made to secure an item for purchase and the balance is paid off at a later date, usually after a number of repayments. The initial deposit may be a fixed amount or a percentage of the total price.
When purchasing an item, there are many ways in which we can make this purchase, perhaps many more than you realise.
Examples
Example 2
Maria purchased on lay-by an item valued at \$180. If she paid a deposit of 19\% and paid the balance off with fortnightly payments of \$26, how many fortnights are there until she receives ownership of the item? Round your answer up to the nearest integer.
Lay-by is a method of payment, where an initial deposit is made to secure an item for purchase and the balance is paid by instalment. Then get the item once it is paid off.
Purchase with a bank card
This option is very similar to spending cash. Instead of physically withdrawing money from an ATM and then making a purchase, you use your bank card the cash register and the amount required to make the purchase is transferred from your bank account to the bank account belonging to the shop.
When purchasing using this option, you need to be sure that you have enough money in your account. You also need to be mindful of how many transactions like this you can make before your bank starts charging you fees for doing so.
Examples
Example 3
State the question
By purchasing with a bank card, you use your bank card the cash register and the amount required to make the purchase is transferred from your bank account to the bank account belonging to the shop.
Purchase with a debit card
To make an online purchase, the most common option is to pay with a Credit or Debit card. A debit card operates in the same way as a credit card, but instead of using borrowed money (as we'll discuss below), you use your own money. Once you have your debit card, you transfer money from your account into the account for the debit card, and then you're ready to make a purchase.
Examples
Example 4
State the question
By purchasing with a debit card, you transfer money from your account into the account for the debit card, and then you're ready to make a purchase.
Purchase with a credit card
A Credit card is a very different purchasing option as rather than using your own money, you borrow money from the bank to make your purchase. More information on credit cards can be found in the last lesson of this chapter.
The way most credit cards work is you have a certain number of "interest free days" after you make a purchase. After that time has passed, the bank will begin to charge you interest on the balance on your card. This means that not only do you have to pay the bank back for the money you borrowed from them, but you also have to pay a fee in the form of interest for borrowing that money.
Some people use a credit card for convenience and always pay back the amount they owe the bank within the interest-free period. In this way it's not much different to using a debit card. However, many more people accumulate a lot of debt by not making enough repayments.
Examples
Example 5
State the question
By purchasing with a credit card, you borrow money from the bank to make your purchase.
Hire purchase or deferred payment plan
Purchasing using a Hire Purchase or deferred payment option, allows you to purchase more expensive items, like a television, without needing all the money to make the purchase. A deferred payment plan is an arrangement that essentially allows customers to "buy now and pay later." It is a bit like lay-by in that you pay and deposit and do not have to pay the balance until sometime in the future.
Usually, you enter into an agreement with the company selling the goods, that you will pay for the item in monthly installments over a certain period of time. In return, you are allowed to take the item home to use straight away.
It's similar to using a credit card or applying for a personal loan in that you will be charged interest by the company. So your monthly payments or installments will include paying back the cost of the item as well as paying interest charged.
Examples
Example 6
Oprah is interested in buying a new computer valued at \$1818.09.She doesn’t have the money to pay up front, but the store has an option to pay by hire purchase, with 12 equal monthly payments.
Oprah wants to avoid paying more than \$192 per month. What is the largest simple interest rate, R\% p.a., that Oprah would to agree to? Round your answer correct to two decimal places.
How much more does she pay using the hire purchase with this simple interest rate, than if she paid with cash?
Example 7
A store offered interest free terms for 23 months on all purchases. Valentina purchased a \$322 treadmill by paying an initial \$27 deposit followed by 8 monthly instalments. If she was also charged an account keeping fee of \$3 per month, what is:
The size of each instalment? Write your answer to the nearest cent.
The total amount paid for the treadmill?
A hire purchase or deferred payment plan is an arrangement that essentially allows customers to "buy now and pay later."
Purchase with a personal loan
Making a purchase with a Personal Loan is very similar to using a credit card, but is usually reserved for more expensive purchases, like buying a car.
You first need to apply for a loan from a bank. If you are granted the loan, you'll then make regular payments, usually monthly payments, to pay back what you borrowed plus the interest the bank charges you as the fee for borrowing money.
Depending on the circumstances, you have to carefully consider whether it's worth taking out the personal loan in the first place, especially because you always ending up paying more for the item you purchased than the asking price. This is because you pay back what you borrowed, plus the interest charged. When thinking of buying a car, keep in mind that a car depreciates, or loses value, as soon as you buy it. Do you really want to pay even more than the purchase price?
It's important to be familiar with the various purchase options so that you can make decisions on what to purchase and how to purchase. Understanding these concepts means you have strong financial literacy and are then less likely to get yourself into financial difficulty as an adult.
Examples
Example 8
Luigi has two payment options for purchasing a new item as shown in the table below:
| Purchase option | Interest rate | Compounding interval |
|---|---|---|
| \text{Hire purchase} | 7.45\% | \text{quarterly} |
| \text{Personal loan} | 7.25\% | \text{monthly} |
Find the effective interest rate E_{1}\% (that is, the equivalent annual interest rate) of the Hire purchase. Give your answer as a percentage, correct to two decimal places.
Find the effective interest rate E_{2}\% (that is, the equivalent annual interest rate) of the Personal loan. Give your answer as a percentage, correct to two decimal places.
Which option is preferred if Luigi wishes to pay the least, assuming that he pays in intervals of quarter.
You first need to apply for a loan from a bank. If you are granted the loan, you'll then make regular payments, usually monthly payments, to pay back what you borrowed plus the interest the bank charges you as the fee for borrowing money.