Installment Plan

The monthly installment, the total paid, and the interest added on top of the price.

Formula

How the calculation works

An installment plan is a loan with the price as the principal, so it uses the same amortising formula. The only special case is a zero rate, which is common on shop finance and is handled by a plain division rather than left to produce a division by zero.

The number to watch is the gap between the price and the total paid. On a 1,200 item over 12 months at 0% the gap is nothing; at a 20% rate the same plan costs about 133 more, which is the real price of spreading the payments.

Common mistakes

• Reading a monthly rate as the yearly one. Dividing the annual rate by twelve understates the true compounded cost, so use the APR figure for the real annual price.
• Assuming zero percent is free in every sense. The price may already be higher than a cash purchase, in which case the interest is hidden in the ticket rather than absent.

When to use it

• Use it before agreeing to shop finance, so you can see what the installments add on top of the ticket price.
• It is also the honest way to compare a zero-percent plan with paying cash: enter the cash price as the principal and the gap shows what the convenience costs.

Worked example

A 1,200 item over 12 interest-free months: 100 a month, 1,200 total, no interest.

Common questions

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Last updated: 2026-09-29